Why epoch-defining AI is today's most important investment theme
(and the safest way to profit)
Summary of Whitepaper
Montaka Global Investments
Most investors are aware that artificial intelligence, or AI, is an important transformation. But many still underestimate the sheer world and life-changing power of this revolution and its investment potential.
AI will recast and refashion every aspect of life: how we consume, how we work, how we monitor industrial machines, how we deliver healthcare, how wars are won, and how we solve climate change.
Not only is software eating the world, but it is becoming a lot smarter at an accelerating rate and will continue to do so. Why? Because of AI - and more specifically, machine learning (ML), the most common and practically applicable subset of AI today.
There are myriad ways investors can profit from this AI transformation, but Montaka believes the world's leading cloud computing providers, or 'hyperscalers', particularly Amazon, Microsoft and Alphabet (owner of Google) are one of the safest and surest ways to win.
Many investors perceive these mega-tech businesses as 'well-understood', 'mature' and sometimes even 'boring'. We disagree. We believe AI will spark a new phase of hypergrowth for these companies that will take investors by surprise and trigger a big re-rating of their shares.
The hyperscalers are uniquely positioned to create an 'AI fly-wheel'
The world's hyperscalers are investing heavily in low code/no code interfaces (including, for example, drag and drop interfaces and natural-language-to-code translators) to democratise the development of AI-based enterprise applications so they are used by more and more employees of the cloud providers' customers.
The second driver of massive demand for compute and storage services delivered by hyperscalers is that AI is increasingly being incorporated into every software application in every device. This includes IoT for which we are about to see an explosion in smart devices, deployed at the 'edge', built to be used across all aspects of life.
Data Generation - By category
3. ML drives surging demand for compute and storage
The effect of incorporating ML into applications is a significant increase in compute and storage intensity, which will benefit hyperscalers. The more successful an AI application is at continually extracting additional relevant data to virtuously improve the accuracy of the embedded ML models, the vastly more compute and storage that is required.
4. Hyperscalers set to dominate 'ASICs' - the new wave of chips powering AI
Another reason that hyperscalers are positioned to win from AI is that they are at the cutting edge of developing new chips - Application Specific Integrated Circuits (ASICs) - that will dominate in coming years.
Successful innovation on chip energy efficiency is an imperative for the long-term proliferation of AI. Given the enormous economic incentives at play, there is a high probability the hyperscalers will lead this innovation. Not only will this have a positive direct impact on the world's physical environment, but the enabling of increasingly powerful AI will likely, itself, resolve many of the challenges the world needs to overcome to mitigate climate change risks.
6. Hyperscalers will benefit from growing barriers-to-entry that makes them long-term winners from AI
Today's hyperscalers have a significant lead over competitors and it is highly likely this lead will only extend over time. The 'barriers to entry' in the space are already very high - and rapidly growing higher, all but eliminating the realistic prospects of a major new competitor materialising.
Montaka believes AI will drive much, much more demand for compute and storage - both in the cloud and at the edge - than many are expecting today. Furthermore, this growth is largely assured, the long-term winners are already known today with a high degree of certainty, and we believe the current stock prices of these businesses are failing to adequately reflect what Montaka's sees on the horizon.
It appears highly plausible that hyperscaler revenue expectations are far too low in the context of the scale of the AI-based opportunity that lies ahead. If so, then Amazon, Microsoft and Alphabet - as well as Alibaba and Tencent - will likely surprise investors substantially to the upside over the coming years.
Investors should also remember that the enormous R&D being incurred by the hyperscalers, while expensed fully each period to satisfy accounting rules, represents an economic investment in future earnings power. Through this lens, hyperscaler earnings power today is 'artificially' understated - and valuation multiples, therefore, overstated.
Funds operated by this manager:
Montaka Global Fund, Montaka Global Long Only Fund