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ChatGPT: Fact or Fad

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As the world wraps its head around ChatGPT and its capabilities, we narrow our focus further to the investment implications of this artificial intelligence (AI) disruption. While expectations for the influence of AI run the gamut, we recognize that the effects (both positive and negative) have the potential to be far reaching, touching a range of industries from education and science to health care and engineering. However, at the highest level, we believe that ChatGPT is a positive disruptor that is creating valuable investment opportunities.

With over 100 million users, we discussed the impacts of AI and ChatGPT with NZS Capital, an investment company that seeks to maximize non-zero-sum outcomes for their clients.

Why Is This So Relevant Now?

While AI can mean a number of things, the hype at present in terms of economics and the stock market surrounds large language models (LLMs), which can be thought of as an elaborate form of autocomplete. Now, chips are dense enough to have the same level of neuro connections as the human brain and will soon have the ability to recreate the functionality of a human interacting with a computer.

Recently, Nvidia’s latest chips reached such a density that you could train them in a matter of weeks, as opposed to several months or years. In addition, OpenAI’s released this technology as a consumer product, ChatGPT, and ultimately unveiled its 4th iteration for public usage which accesses real-time information from the internet. ChatGPT 4.0 remembers everything it learns as its users teach and engage with it much like a human brain learns. In conjunction with Bing Chat (a chat search interface with GPT within it), users can toggle between creative answers and precise answers, creating potential to change the way we think about and utilize the internet.

Where Are the Investment Opportunities?

We find it important to note that this AI is being developed on existing infrastructure and is a digital innovation. This translates to a faster ramp up and favors incumbents who are likely to continue to capture a large portion of the value from AI. In our view, this is one of the largest margin tailwinds and productivity increases we have ever seen in the economy, so it will be important to ensure that companies are not falling behind on this wave. The rolling snowball network effect of data and using the AI will be vital to capitalizing on the velocity of the change, in our view.

When we look at the investible universe, we recognize that AI will make use of a lot of semiconductors. Semiconductors are participants in this important ecosystem in which all members are needed to complete necessary functions of this process. They enable us to be in this moment in history where AI is becoming very real and tangible in our everyday lives. The complexity of the technology and head start of the ecosystem participants make each vital in nature and also make the ecosystem very fragile. At present, companies within the ecosystem largely hail from Japan, the Netherlands and the U.S.

What Are Some Examples of Companies Vital to the Process?

As mentioned previously, Nvidia’s graphics processing unit (GPU) capability positions it well for this phenomenon. As one of only two companies that produce GPUs at scale, Nvidia’s start in gaming is translating well in developing these specialized chips. The company’s CEO Jensen Huang understood the possibility for AI a long time ago and spent a lot of time and money developing its programming language, CUDA (compute unified device architecture) when there was no application for its usage. Nevertheless, Nvidia took its good luck and positioning and capitalized on it, and now holds an important position in the AI ecosystem. It is notable that such a large company building physical products can grow this fast for this long, in our view.

Another tech company, ASML, developed one of the most complex human machines ever built that enables identification of semiconductors and allows them to have the computing power of a human brain. While other companies have tried their hand at accomplishing this technology, all others have tried and given up, making ASML the only company in the world to do what they do. Subsequently, if ASML did not exist, the world would be set back a decade from where it is now.

Both of these companies possess a true edge and firm placement in the aforementioned ecosystem that enables AI to thrive. We find it important to note that other natural monopolies are occurring in the space as well. In this way, they have created moats around their businesses, making them valuable participants in the workflow.

On the other hand, companies that fall behind on adoption (or at least acknowledgment) of AI, may fall behind their competitors. At present, we find that we are living in a world of fatter tails, with a wider range of possibilities that a business must accept and be willing to adapt to be well prepared for the future.


Important Information

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to purchase or sell a particular security.

This material is for informational and illustrative purposes only. This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

Investing entails risk and there can be no assurance that any investment will achieve profits or avoid incurring losses. There is no guarantee any company or investing strategy will pay dividends.

All investments involve risk including the possible loss of principal.

A Graphics Processing Unit (GPU) is a chip or electronic circuit capable of rendering graphics for display on an electronic device.

A Large Language Model (LLM) is a computerized language model consisting of an artificial neural network with many parameters (tens of millions to billions), trained on large quantities of unlabeled text using self-supervised learning or semi-supervised learning.

Harbor Capital Advisors, Inc. is not affiliated with NZS Capital.

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