AI or Artificial Intelligence is a feature of the world economy that has proved difficult to define (not the first instance for the investment industry). A resolution to the debate on the correct meaning is not the intention of this article. There are acknowledged (unanimous or not) branches of AI that are having a profound impact on companies, the way they are run and ultimately, in our view, the way they should be valued. We believe that companies that have assessed, scrutinised and invested appropriately into AI will outperform those that have not.
To frame our hypothesis we will refer to Kaplan and Haenlein who described AI as “a system’s ability to correctly interpret external data, to learn from such data, and to use those learnings to achieve specific goals and tasks through flexible adaptation”. For those who disagree with the above quote or the application of it to this article I claim “natural stupidity”* in my defence.
No longer the play thing of Bletchley Park or Silicon Valley, AI has been the mainstream for a number of years, and adoption is growing. Bernard Looney, recently elected CEO of energy giant BP (a company all of us will be exposed to in one way or another) has cited the necessity of digital cost saving measurement. His mission is to make BP “the leading digital upstream business” which is essential he believes “for productivity, for cost, for efficiency” and also “for the next generation”. Conspicuous by its absence was the mention of “shareholders”. So what does this mean for investors? Mr Looney believes it could be up to 30,000 barrels of oil a day.*
Smith and Williamson is a long term investor and as such looks for trends in the market that will have a deep impact on companies, sectors and ultimately the global economy. We believe AI investment represents such a trend. If we look back through history at the top 10 largest companies in the US, we see a trend, “if you build it, they will come!”** And by they I am not referring to ghostly baseball legends and Kevin Costner’s dad, I’m referring to customers, revenues and profits.
There is only one sector representative that has entered and then consistently remained in the top ten largest companies in the US and that is Energy giant Exxon (originally US Oil). Telecom company AT&T stayed around and still has a role to play after building the communications infrastructure. Other sectors have come and gone. Why is this? We subscribe to the idea that if companies build the infrastructure for fundamental aspects of the global economy, those companies will endure. Existing infrastructure is costly to replace so there needs to be significant efficiencies or performance upside for it to be rebuilt.
Of the sectors that have dominated at some point it is now Technology, through AI, which is looking to improve on the existing infrastructure of all the others and drive the next spurt of global growth. According to Mr Looney BP, they have enough data on their supply chains and distribution networks to fill a stack of DVDs as high as the Eiffel Tower*. Mr Looney has outsourced the analysis of that data to Palantir Technologies to look for ways to reduce slowdowns and halts in production.
If a 100 year old energy industry is diverting significant capital expenditure towards AI the read across to other industries is palpable, particularly those with long or complicated supply chains. Whatever the definition, AI gives companies that use it successfully a notable advantage.
*Source FT, Data Drilling, October 6 2019
** W.P. Kinsella, Shoeless Joe/ Field of Dreams 1989