Generative artificial intelligence (GenAI) has been one of the hottest topics in the investment community this year, at times getting even more attention than the Fed and its battle with inflation. One prominent software executive in a July 2023 interview with the Associated Press called alternative intelligence “not just the most important technology of our lifetime, but probably the most important in any lifetime.” Its impact on stocks has been significant, especially in the technology sector where stocks deemed as beneficiaries of GenAI have meaningfully outperformed this year while those perceived as being threatened have severely lagged. With several billions of dollars already being spent or committed for building out GenAI infrastructure, there are questions emerging about the practical uses for GenAI and the extent to which there will be business cases and financial models that can justify the enormous investments being made.

GenAI is distinguished from earlier iterations of artificial intelligence (AI) by its creative capabilities where prior deployments of AI were more focused on automating or completing tasks. GenAI brings with it a wider range of applications but also requires significantly more computing power. In considering the potential for GenAI investments to yield attractive returns despite its higher cost it has been helpful to examine the breadth of use cases, especially outside of the technology sector.

Within my coverage (consumer discretionary, consumer staples and financials), AI has been used for years, most commonly in the form of machine learning. Ecommerce retailers have used machine learning to make automated product recommendations to shoppers. Lenders have used machine learning to create models that predict the likelihood of borrowers paying back their loans. With the advent of GenAI, companies in the consumer and financials sectors have a much wider opportunity to use technology to boost the productivity of their employees and enhance margins. In just the last few months, several notable use cases have been discussed by companies in which we have considered investing:

• A global prestige fragrance manufacturer is using GenAI to produce advertisements, reducing the need for expensive photographers and models and speeding up the deployment of new creative content
• A provider of K-12 education is employing GenAI for creating marketing materials and is in the early stages of automating administrative work for teachers which would free them up to spend more time working directly with students
• A leading mobile learning platform is using GenAI for accelerating the pace of releasing new learning content while also enabling enhanced interactivity
• A financial services company that spends $2.5b annually on its contact centers is expecting to save $1.5b by using GenAI to handle 80% of calls

Although highly anecdotal, these widely varying deployments of GenAI point to a technology that is likely to have an impact across all sectors. It has the potential to boost earnings for many companies, increase customer engagement and help workers do their jobs more efficiently. As with prior technological upheavals, there may be a potentially painful period of transition coming for some companies and jobs that will be made obsolete by the powerful capabilities of GenAI (condolences to any readers who are models in fragrance ads). But from an investor’s perspective the potential productivity enhancements appear very attractive. From a macroeconomic perspective, GenAI has the potential to measurably improve productivity across the economy and may even become a key component of restraining wage inflation in the face of what remains a tight labor market.