Title: Artificial Intelligence: The Next Technological Tectonic Shift?
Abstract: In this podcast, Equity Portfolio Manager Brad Mak and Rob Almeida, global investment strategist, discuss how the commercial application of artificial intelligence may affect, enhance, be neutral to or detract from companies over the next three to five years.
Rob Almeida: Welcome to another edition of the Strategist’s Corner podcast. I’m your host, Rob Almeida, MFS global investment strategist. This episode focuses on AI, and I’m thrilled to be joined by MFS® US and Global Large Cap Growth Portfolio Manager, Brad Mak. Our discussion will focus less on the science behind artificial intelligence, or language learning models, and more on the commercial application of the science and how it impacts stocks.
Profits drive stocks. Thus how this new technology will impact how companies run their businesses will be ultimately what matters: what revenue streams are at risk, what costs can be taken out, what productivity may be gained and how all this ultimately affects profit and loss statements. I hope you enjoy.
Disclosure voice: The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as an offer of securities or investment advice. No forecast can be guaranteed. Past performance is no guarantee of future results.
Rob Almeida: Brad, welcome.
Brad Mak: Thanks for having me, Rob.
Rob Almeida: Starting at a high level, what are you hearing from companies? How are they talking about AI, and then I guess most importantly, how are you and the investors thinking about AI in your portfolios?
Brad Mak: That’s a great question. I think just at 30,000 feet, I think the consensus is this is a tectonic shift in technology.
Rob Almeida: Yep.
Brad Mak: It’s akin — you’ve heard it mentioned multiple times — to the creation of the Internet, the invention of the mobile phone. Anytime there’s a big pivot in a technology platform, there’s always more questions than answers. I would just say right now there is a bit of a frenzy. It feels very similar to 1999, 2000, where every company attached dot-com, the early 2010s, where every company said they were a cloud company, every company’s narrative is now how AI is going to help them.
From our standpoint, our job is really to sift through that noise and understand how this is going to impact industries and companies over the next three to five years. What we’ve been trying to do is really think about every industry and company. Just where is it most obvious where companies are going to win? Which companies, industries where it’s at least neutral, if not going to help them? And then more importantly, which companies potentially are going to be at risk from a business model, profit, margins, all of that?
Rob Almeida: Yeah. Let’s talk about category three. A couple years ago or earlier, when we were doing these podcasts, CV Rao, who you know very well and worked closely with, was a guest, and he talked about Internet 1.0 or Web 1.0 companies, which you referenced earlier, then Internet 2.0 and then ultimately Web 3.0. His point was — what resonated with me, and I think a lot of the listeners — was 75% of the companies that exist currently — call it the Web 2.0 era today — didn’t exist back then.
Sort of the Schumpeter creative destruction innovators get innovated. That company three or that category three category, without mentioning any names — is there any maybe obvious points or obvious relative industries or anything like that that you can share with us?
Brad Mak: Yeah, so I think what we’re going to see over the next three to five years is companies that were formed over the last 10 to 20 years have incumbent profit pools that they need to defend, and they’re going to look for ways to use AI to help at least protect that and then try to augment it. What we saw coming out of the Internet era and the mobile era is there will be hundreds if not thousands of new companies funded. Most of them will not scale, but a handful probably will come that we are not thinking about today.
What we’re trying to figure out is what does AI do? It really is a set of computer programs that helps make things more efficient: workflows, repetitive tasks. And it’s getting more and more intelligent. We are just thinking about businesses that charge per seat or rely on labor as their business model. We’re not sure in the near term, but in the long term there are questions. There is deflationary pressure on labor. Does that just mean less seats to sell to with a software-based business model? If your business is hiring people to implement outsource services, if some of that gets automated away, what does that mean for your business? How are you going to pivot?
Rob Almeida: Yeah. Then it just comes back to blocking and tackling. What does a company do? How do they do it? And can they keep doing? What’s the durability of that? Is that — sounds like that’s what you’re talking about.
Brad Mak: 100%. We’re always focused on what is the rate of growth, and the duration of growth of a business, and how durable is that?
Rob Almeida: Right. That rate of growth is obviously a function of value proposition. If that value proposition is now being duplicated by AI, LLM, whatever it might be, that revenue stream goes away.
Brad Mak: That’s right. If you take a generic enterprise-software company today, they sell some sort of software to help automate a workflow. They are introducing AI features and functionalities somewhat like a copilot, and they want to charge more for that.
Rob Almeida: Yep.
Brad Mak: We don’t know how much the customers will be willing to pay for that, probably something for the productivity enhancement. On the flip side is if your Fortune 500 company says, “We don’t need 5% of our headcount anymore, because it’s getting audited in May.” That is a headwind offsetting a potential tailwind. We don’t know: Is that neutral? Is it positive or negative? These are the questions we’re asking company by company within each industry on the implications.
Rob Almeida: Yeah. Maybe this is an out of bounds question, but taking a step back, so coming out of the global financial crisis, central banks took rates to zero, quantitative easing. You had an environment where a lot of businesses were fungible, just because capital costs were so low. Maybe some of these companies that came out of it were at risk. Just at a high level, it just seemed like so much capital was divested from physical assets, plant, property, equipment into — let’s call it intangible software etc.
Almost now, it just seems like we’re flipping the script. Supply chains are shortening. You have industrial companies that sell parts and services to help companies reduce greenhouse gas emissions etc. That capital has to come from somewhere. Maybe if I’m putting these two things together here, we have an environment where rates are no longer zero, those companies might not be fungible. Now, you add in this dynamic that you’re talking about, with AI possibly duplicating their revenue streams. Is that an unfair —
Brad Mak: I think it’s a fair set of observations and questions, and I see it as two parallel drivers of secular growth.
Rob Almeida: Okay.
Brad Mak: A lot of the hard asset type topics you brought — onshoring, reshoring, strengthening supply chain —that has to happen from a supply chain resiliency, from a national-security, from a just geographic- diversity. It has to happen. AI has to happen. The ship has sailed. If you are a company facing potential disruption and you do not invest in an AI roadmap, you will eventually be disintermediated.
It is table stakes. What we saw the last decade was just low rates, free money, and we saw a lot of businesses that were funded in fintech and biotech. A lot of that has evaporated, but there’s still a lot of dry powder sitting at VCs and PE firms, and they are funding this next wave of AI companies.
Rob Almeida: Right, right. Let’s go back to category two. So companies that may be on the neutral end, that whether they are levered to AI, from the standpoint of they’re selling products or services alongside that, or maybe it’s companies that are benefiting because they’re getting more productivity — how are you thinking about that bucket?
Brad Mak: I think it’s a broad bucket and it’s constantly evolving, literally week to week, month to month, depending on what companies are communicating about their AI strategy. As investors, we historically have always tried to lean on the suppliers or the picks and shovels that are providing the required — whether that’s the capital, or the compute, or the hardware, or the semiconductor tools required to enable this. That’s where we focused on at least neutral-to-positive.
Then as we move up the stack, there’s a broader set of questions where you can’t just make a broad statement: This is good or this is bad. It is company specific. This is where active management comes in. This is where a global research platform comes in. This is where interviewing companies, doing comparisons across geography, really matters, to sift through and figure out who has the right roadmap. Where does it make sense where they’re going to win versus those that are just sort of putting out a lot of press releases where there’s no substance there?
Rob Almeida: As all these companies, all these tech companies, are talking about AI and delivering a value proposition, are there ways to channel check? You have to take them at their word, and ultimately you want to see it through the income statement, but are there ways to learn that? Who has a competitive technology that will be commercially successful?
Brad Mak: Yeah, it’s a great question, and I’ll give you some real time examples of what we’ve been doing at MFS. We’ve had not only companies that are perceived winners, where we’re talking to the companies — you see it in the numbers today — but it’s the companies where we have questions about category three. Well, what are you doing? How are you thinking about it? How will this actually benefit you? We are talking through industry channel checks around that.
We’re talking to old-line companies that historically maybe wouldn’t have participated in this technology shift, and asking them, “What is your AI roadmap? How is this going to implement and maybe change how you run customer service or product development in health care and life sciences?”
That creates a mosaic of information that helps you understand the duration and rate across sectors at a deeper level than just going to conferences or reading press releases of what companies are saying.
Rob Almeida: Well, it just seems like circling back to your comments earlier about the nineties, where you’re right, anything that had dot-com or dot-net attached to it skyrocketed. Then there was also a second derivative impact on the real economy. It wasn’t just XYZ.com that went out of business, but it was the people that worked there, the supplies they were buying. There’s a real economic impact, but you can reverse engineer that, right?
If you’re talking to a staples company or a financials company, it’s, “How are you thinking about AI, and who are vendors that you would work with?” You can maybe use that to circle back to who has a value proposition that’s durable.
Brad Mak: Yep, exactly.
Rob Almeida: Got it. Brad, regarding the economy, Ameris[HJ(2] law posits that as a society, we tend to overestimate a new technology, pointed out that we did that in the nineties, but then we underestimate it in the out years or over the longer term.
You’re not just a technology investor. You’re a generalist. You have to think across your portfolio and how this impacts so many. How are you and your partners and the team just maybe thinking about it from a real economic standpoint and across your portfolios?
Brad Mak: Yeah, it’s a great question. At the beginning, we talked about winners, neutral, and losers. I think in general, for the rest of the economy outside of traditional technology, it’s to net neutral to beneficiary. What it’s going to do is drive more efficiency throughout every organization. That could be labor. It could just be time spent. What I think will happen — and you’re already seeing this — is innovation. The pace of innovation should continue to accelerate.
A couple examples: There’s life science companies, pharmaceutical companies that are using AI to help with drug discovery and molecules. It is just reducing the time to drug discovery. That takes costs out of the system.
Rob Almeida: Speed to market.
Brad Mak: Speed to market.
Rob Almeida: Okay.
Brad Mak: You’re going to see the same thing with content creation, whether that’s images or video or creative. Then employees will spend less time doing mundane tasks and spend more time thinking critically and adding value to services and products that will drive revenue for companies. I think in general, as we look sector by sector, we think this should be more likely a tailwind than a headwind.
Rob Almeida: Now, on the flip side, so it’s a productivity enhancer, and just in a lot of clients I talked to, I think that’s just a broad assumption that it’s a net positive in aggregate for everyone. It probably is when you average it out, but correct me if I’m wrong: This new technology, it’s probably not going to save a company with terminal value problems already. A company that was chugging along throughout the 2010s because they were offshoring labor, benefiting from low interest rates, now these things get exposed with labor costs elevated, capital costs elevated. Is AI going to protect a struggling company in a recessionary time?
Brad Mak: Maybe in the short term they can maybe cut costs faster and survive a little longer. If we think innovation will move forward faster, it would exacerbate the weaknesses of their structural positioning in an industry. That would be my guess.
Rob Almeida: The competitiveness will get even —
Brad Mak: It should widen.
Rob Almeida: Right. That makes sense. Bringing it back to — so not just importance of selectivity — those three categories, category one, two and three they talk about within tech but actually on a much broader level, across the S&P, or across the Russell 1000® growth, across indices broadly.
Brad Mak: Yeah, and I don’t think we’re going to have answers in the next couple of years. This is going to take three, five, 10 years to see it play out in tangible ways outside of what we’re seeing more concentrated in the technology sector. I think we’re still in early innings. All of the news flow and capital flows is really concentrated in these larger-cap technology companies that are just — it is an arms race now to spend and invest to get this technology up to a certain level of accuracy and reliability, add in the regulatory framework.
Then there’s a long tail of companies as they figure out how this helps. In a lot of cases, it may just be incremental, right? It’s turning a conversation into our PowerPoint presentation, so it’s not transformational. It’s incremental.
Rob Almeida: Well, it is amazing. You had that productivity boost in the nineties when we put computers on every desktop and connected them all through wires, and now it’s negative. It went away. Be careful what you think you know.
Brad Mak: Yeah, right.
Rob Almeida: Future has no facts.
Brad Mak: I think what’s exciting — it’s been a crazy last couple of years, and I think coming into this year, I think the thought was we went through COVID. There was winners. Then we got out of COVID, and then there was a COVID hangover. Companies that sort of participated in this and sort of extrapolated all the trends that were happening, there’s this digestion. There was a thought maybe we’re in the later innings of a lot of these technology shifts that have happened over the last 10 years, whether it was in e-commerce or payments or digital advertising.
AI. The reason why it happened so fast, literally in the span of six months, and the speed of it and just the ubiquity of it — everyone can touch and feel this at home on using ChatGPT — it’s creating another leg of growth for the economy and for these companies which wasn’t here, at least apparent, six to 12 months ago. That’s different now.
Rob Almeida: Yeah. Interesting. Brad, thanks so much for joining us.
Brad Mak: Yeah, thanks for having me.
Rob Almeida: While an AI gold rush is underway, it’s in early days and investors have a lot to take onboard. Thanks to Brad for helping us think about the potential risks and rewards of AI in a variety of tech and nontech businesses. Thanks to you for listening. For more insights, subscribe to the Strategist’s Corner podcast, or wherever you get your podcasts.
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