The Future of Artificial Intelligence: Unveiling Investment Opportunities and Challenges in 2024

Introduction:

Artificial intelligence (AI) has captivated the world’s imagination, igniting both excitement and anticipation among investors. While AI holds immense potential, 2024 may not be the year for significant financial gains in the sector, with a few notable exceptions.

Direct Monetization Challenges:

According to Gil Luria, managing director at D.A. Davidson, direct monetization of AI services remains elusive for most companies. Businesses are increasingly adopting AI, but software makers are more inclined to offer AI features as bundled perks or upgrade incentives rather than standalone paid products.

The AI tools currently available, particularly those centered around generative AI, are still in their early stages of development and face various challenges. Companies are likely to bundle these offerings to drive adoption, delaying their emergence as material growth drivers.

AI Trade Enthusiasm and Market Performance:

Despite the monetization challenges, investors have shown remarkable enthusiasm for AI-related stocks. The Software ETF IGV has outperformed broader market indices, reflecting the excitement surrounding AI. However, Luria cautions that companies must deliver tangible AI results to sustain this investor interest.

Microsoft and Adobe: Standouts in the AI Arena:

Among the few exceptions to the monetization challenges, Microsoft and Adobe stand out as D.A. Davidson’s top picks for mega caps. These companies excel in AI capabilities and have solid businesses beyond AI.

Adobe leads the industry in text-to-image generation, integrating generative AI features across its creative suites. It employs a generative AI credits system that entices users to pay more for enhanced functionality.

Microsoft, with its Copilot services, charges users extra for accessing AI assistants embedded within Microsoft 365, GitHub, and other platforms. Their cloud service, Azure, is a major revenue generator, providing access to large language models (LLMs) from OpenAI and other providers for developers to build applications.

Client-Facing AI Software: A Promising Future:

While direct monetization of AI services may take some time, software that aids client-facing roles holds promising potential. Generative AI’s use cases currently focus on text generation, text summarization, and text-to-image generation.

These use cases align well with pre-populating emails, summarizing calls, and answering common questions. Salesforce’s AI assistant, Einstein Copilot, targets a public launch in late February, aiming to capitalize on these opportunities.

Data: The Key to Mitigating AI Hallucinations:

In the age of AI, data is more valuable than ever. Firms with access to vast amounts of data and expertise in data integration are well-positioned to succeed. Salesforce, for example, has a wealth of data from companies using its products for customer service, marketing, and other tasks.

Access to more data can help address a common challenge in AI: hallucinations, or false answers. By providing more context and integrating business context into prompts, AI models can produce more accurate and reliable responses.

Smaller Models and Bot-to-Bot Collaboration:

While large language models like ChatGPT receive much attention, companies pioneering more efficient models are likely to reap significant rewards. Smaller models, containing only pertinent information, are less expensive to operate and easier to profit from.

Companies like Microsoft and Salesforce are actively working on developing these smaller AI models (SLMs). Such efforts aim to rival the performance of larger models with significantly fewer parameters, reducing costs and increasing profitability.

The future of enterprise AI may involve bots collaborating with bots. As platforms become more interoperable, AI assistants may communicate and exchange information to better serve end-users. This collaboration can enhance efficiency and productivity.

Conclusion:

While 2024 may not be the year for widespread financial success in AI, investors should keep a close eye on the sector’s developments. Companies like Microsoft and Adobe, with their advanced AI capabilities and solid businesses, are well-positioned to lead the way.

Data-rich firms, those pioneering smaller AI models, and players enabling bot-to-bot collaboration are also worth monitoring. As AI matures and monetization strategies evolve, investors may find attractive opportunities in the years to come.