The growth of artificial intelligence (AI) has shown it is not a short-term trend, but investors need to be cautious as to which technology firms to back as the sector shifts into its next phase of development, a global asset manager has pointed out.
Nuveen managing director, head of macro credit and global investment strategist Laura Cooper said investing in AI was “no longer just about owning the winners. It is increasingly about avoiding the losers – those with business models most at risk of disruption”.
“AI is not a bubble technology, but that doesn’t mean every AI bet will pay off. There are companies spending significantly on AI that likely won’t see a return,” Cooper added.
“The transition from focusing on eye-watering capital expenditure to the return on investment has already begun. Large, scaled incumbents are investing aggressively not only to innovate, but to protect the moats they have already built with the winners still unknown.”
She said the impact of AI on software was leading to the repricing of those stocks as the advances in large language models was changing the cost of building and delivering it, while lowering barriers to entry and intensifying competition.
“This is challenging existing business models, driving a structural shift from subscription to consumption-based pricing and raising questions about the future of the software as a service model itself,” she said.
“This is not a ‘sell all software’ moment, but presents an opportunity for security selection. The sector is experiencing necessary price discovery as the market distinguishes between companies with durable models with pricing power and those facing disintermediation.”
She noted investors will need to be more proactive in their thinking and look for investments that underpin future changes.
“For investors, the passive exposure to software is no longer the same bet it was three years ago. The index-level trade has become a stock-picking story,” she said.
“From an opportunity standpoint, the infrastructure and cybersecurity subsectors carry the highest perceived AI safety.
“The former is underpinned by strong demand driven by data movement, storage and analytics and as AI expands the ‘attack surface’, incremental spending in cybersecurity is likely to remain resilient in this relatively unique part of the market.
“In contrast, the application layer is most exposed. This is where the user interface sits, where disintermediation risks are highest and where the shift from software as a service will be felt most acutely.
“The AI investment thesis hasn’t disappeared, it’s just evolving. The recent sell-off reflects a repricing within a transformative AI cycle and periods like this tend to create fatter tails with more winners, but also more losers.
“The opportunity lies in identifying this flip: who will win versus who will lose.”