Fidelity International assembles a band of investment analysts and portfolio managers to visit technology companies on the US west coast every year. This year, Senior Analyst Jonathan Tseng assess which companies are best positioned to capitalise on the artificial intelligence (AI) revolution, considered the biggest investment trend in history.
California State Route 82, the 68-kilometre highway which forms the backbone of Silicon Valley, is the old El Camino Real - the royal pilgrimage route that linked the Spanish missions of old California.
It’s an appropriate metaphor. We’ve been making our own pilgrimage to the West Coast for more than a decade, seeking out and meeting with the most promising companies in this intensely entrepreneurial corner of the world. On my latest research trip to Silicon Valley, I was joined by 14 other Fidelity portfolio managers and investment analysts, all of whom have a particular interest in the operations – and fortunes – of global technology companies.
This time, it’s all about AI. Although OpenAI’s breakthrough large language model ChatGPT launched three years ago, the technology still feels very nascent. Company executives continue to speak in terms of “expectations” and “potential” but few can point to where it has delivered real value.
We’re here to find out whether AI will match the lofty expectations (nearly a quarter of a trillion dollars spent on AI last year) and deliver on that potential.
There is simply no substitute for meeting companies on their own grounds. And it is very fertile ground. In a single mile along Route 82 you can pass more tech market capitalisation than exists in most countries, even continents. From the chip to the computer to the cloud, there’s always something new happening here.
Disruption breeds creation
One area I’m particularly keen to explore is the role of AI in workplace efficiency. So, we begin our journey to the north, at Microsoft’s headquarters in Seattle. Microsoft has dominated the workplace for years through its suite of interconnected applications - Word, Outlook, Excel - all designed to make your white-collar work experience as integrated as possible. How will they fare in the age of AI?
We arrive at the company’s headquarters, which is more a university campus than a stuffy office block. The sun is blaring, the coffee is excellent, a vast new extension is going up. The management team is quietly confident in what they tell us.
But as much as Microsoft wishes to harness AI, it knows that a new technology like this is ultimately a disruptor - and that opens doors to competitors. In San Jose we meet the video conferencing giant Zoom. Chief executive Eric Yuan wants to make sure every digital meeting you have leads to action: his AI agents will automatically create the agenda points, the key takeaways, the follow-up calls - everything you would previously have committed to, but never achieved. He reminds us that their business knows how to capitalise on change. Few of us had heard of Zoom before the pandemic; now it’s integral to the working world. I’m starting to get a sense of how competitive the next few years will be.
There are countless other applications of AI technology beyond the workplace. We meet with Autodesk; their expansive, exposed-brick office on the San Francisco waterfront seems fitting for a builder of architecture software. Mike Haley heads up their industrial research programme, and he tells us how the company is using AI to augment the company’s design programmes. Given that most modern buildings integrate Autodesk software at some point in their design, AI is likely to underpin the construction of tomorrow’s cityscapes.
Other companies like Applovin plan to revolutionise mobile gaming by matching users with adverts they are more likely to enjoy. T-Mobile has recently partnered with OpenAI to create a new way of understanding customers’ intentions before they express them.
Then there are the fast-moving start-ups: Sierra AI is developing AI agents to handle all customer service interactions, changing the way consumers engage with businesses. Co-founder Clay Bavor told us that his agents could fully solve 70 to 90 per cent of incoming customer queries without passing them on to a human. What’s more, it seems to be translating into real benefits for their customers who are using Sierra's subscription management service, with 10 to 40 per cent lower cancellation rates from end users.
That’s not to say I’m convinced by everything we see. Another company seems to be investing huge sums without any clear strategy. This is the ‘Kodak’ style of spending that worries me - businesses that allow a fear of missing out to dictate their decision making. A few businesses don’t look competitive in an increasingly high-stakes market, where the big players will spare nothing to cement their dominance. But idiosyncratic cases of mismanagement shouldn’t distract from a sound structural investment case. It’s our job is to separate the winners from the losers in this new world.
Believe (some of) the hype
We are on the west coast for five days, during which time we will visit over 20 companies. It is a packed schedule, but it’s worthwhile. Visiting multiple companies across the industry allows me to explore the landscape, make comparisons and deepen my understanding.
Most of all, it allows me the chance to answer the question with which I began the trip: is the enormous spend in AI justified? It’s hard to appreciate until you’re out here, but this technology really could change the way society operates. There is no single ‘AI stock’. Rather, all sorts of companies are looking to insert the technology into different aspects of their operations and our daily lives. Whether at work or at home, artificial intelligence is likely to transform the way we interact with the world. And in this once hallowed valley, treading new ground on that particular mission is the new holy grail.
