Investing now in the intelligent future

Artificial intelligence is already being used by companies.

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Key takeaways

  • Investors interested in artificial intelligence (AI) should consider industrial companies as well as technology companies.
  • Predictions about the long-term future development of AI vary widely, but present-day applications are well understood, continuing a process of business automation that has been going on for decades.
 

The proliferation of artificial intelligence, machines that combine formidable computing power with the human-like ability to learn, is being accompanied by hope, horror, and hype. AI's enthusiasts claim it will "help humans solve some of the most complicated problems we face." They cheer as robots beat humans at games like chess, and as AI helps NASA discover distant planets that long eluded human astronomers.

Others—including some leaders in the information technology industry—are far less sanguine and warn that AI will devastate households, communities, and society as it eliminates the jobs that sustain them and guts economies dependent on consumer spending.

The historical record of previous technological advances suggests that unforeseen outcomes are likely and that AI enthusiasts and doomsayers alike may be surprised by how intelligent machines will transform the world over the long term. As New York University professor Meredith Broussard, author of Artificial Unintelligence: How Computers Misunderstand the World, noted at a recent panel discussion on AI sponsored by Fidelity, "Technology does not decide whether it's being used for good or bad." With that in mind, investors interested in AI may choose to focus less on the unknowns concerning what machines may achieve in the future and more on the knowns regarding how existing AI systems are being put to use by humans in the present.

Publicly traded companies face relentless pressure to create value for shareholders. They must do this by growing their earnings through increasing their sales despite intense competition, and/or by cutting their costs. AI is attractive to the humans who run these companies because it may facilitate the development of appealing new products and services that may boost sales. It can also reduce costs associated with employing human workers.

AI and industrial companies

Tobias Welo, portfolio manager of Fidelity Select® Industrials Portfolio (FCYIX), sees AI as a powerful driver of earnings growth for industrial companies as it helps create new products and improve existing ones. He sees AI playing a role "in anything that benefits from automation," including the aerospace, machinery, and electrical equipment industries where "smart" equipment can monitor data about production processes, make adjustments in real time, and learn and operate autonomously.

Welo believes AI may also transform the water and electrical industries. "Hardware manufacturers are expanding their offerings of software-enabled products as municipalities increasingly look to replace existing infrastructure with solutions that leverage AI, sensors, and internet communication," he says. "Smart networks, data, and analytics could enable towns and cities to benefit from greater energy efficiency, reduced costs, and real-time monitoring."

Welo says manufacturers of home and office environmental-control equipment are following a similar path. In "smart" houses, heating and cooling systems will use new and historical information to forecast future activity, behavior, and trends to anticipate what temperature and humidity users prefer in specific circumstances. As of August 31, thermostat pioneer Honeywell International (HON), a leader in data warehouse automation, is a top 10 holding in the portfolio Welo manages. The fund also held agricultural, construction and forestry machinery maker Deere & Company (DE), which paid $305 million to acquire Blue River Technology, a maker of crop-spraying technology that relies on machine learning as a way to enter the AI agricultural market. Other fund holdings Welo expects could benefit from AI over the next 3 to 5 years include United Technologies Corporation (UTX), General Electric Company (GE), and Northrop Grumman Corporation (NOC).

AI and technology companies

Investors who seek exposure to AI can also invest in the technology companies that make the hardware and software for intelligent systems. Sonu Kalra, portfolio manager of Fidelity® Blue Chip Growth Fund (FBGRX), is focused on technology companies whose earnings are expected to grow as demand from companies for AI and machine learning systems increases. Kalra's fund held semiconductor manufacturers such as Nvidia (NVDA) and Broadcom (AVGO).

AI's potential impact on earnings growth may also come from lower costs as well as from new products and increased sales. AI represents the next giant step in the long-running evolution of technologies that boost productivity by replacing humans with machines. MIT economist Daron Acemoglu studies the impact of information technology on the economy and labor markets, and classifies AI as a "replacing" technology that eliminates workers rather than as an "enabling" technology that lets them be more efficient. Welo points out that many of the industrial firms he covers have decades of experience in replacing human jobs with automation, a process which AI could rapidly accelerate. "Automakers have used robots to replace factory workers for decades, but they have only scratched the surface of the potential for AI-equipped robots," he says. Welo calls the use of AI to slash labor costs "the next leg of US and global productivity" because it follows the push by US-based firms to cut labor costs with automation that began after World War II and the moving of production out of the US to low-wage countries which began in the early 1990s.

AI and knowledge workers

Over the longer term, as machines become ever smarter, the same process of automation in which robots have replaced industrial workers may well reach so-called knowledge workers in fields such as law, finance, management, and others where analytic skills currently command a premium. That prospect raises obvious concerns, Broussard says that in order to shape this long-term future, people must "understand what AI is and isn't, what it can and can't do, and when it's really important to use a computational solution and when it's really important to have a human element. "If we do," she says, "we can make a world that is not just convenient for machines, but a world that's convenient and pleasant and positive for humans."

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