SVB MoffettNathanson calls these 'early movers' winners in the AI race

Published Thu, May 11 202310:00 AM EDT

"Early mover" companies racing to capitalize on generative artificial intelligence stand to come out on top in the ongoing contest for dominance in the nascent market, according to SVB MoffettNathanson. So far this year, investors seem to cheer any company connected to AI, boosting shares of Meta Platforms and Nvidia more than 90% each in 2023, and Alphabet and Microsoft by 25% or more. To be sure, AI innovation is in its early stages, with new competitors likely to emerge as use cases blossom, SVB MoffettNathanson analyst Sterling Auty said in a Wednesday note to clients. First generation iterations also require vast human oversight. Providers with larger data sets that can be used for training, or to monetize, are situated to come out on top. Auty sees improved data analysis and automation of routine tasks as among the top benefits from AI. These tools should also help companies and customers better utilize data to make informed decisions and improve analytics for trend predictions. MSFT YTD mountain Microsoft shares in 2023 "From our perspective the winners are going to be the early movers that embrace AI to widen the competitive moat, provide the infrastructure over which AI runs, and those with the biggest data sets," Auty said. MoffettNathanson firm named Microsoft among the top AI beneficiaries. The Windows software maker stands at the forefront of the AI push with its multibillion dollar-investment in ChatGPT-maker OpenAI and new AI additions to its Bing search engine . Auty also cited Microsoft's "locked in" AI leadership and potential growth opportunities from its Copilot offering as potential benefits. Other software companies also stand to gain as companies seek to block malware and security threats. Crowdstrike has been at the forefront of using machine learning to identify potential threats, while also automating routine tasks, Auty said. "AI can help Crowdstrike predict future cyber threats based on historical data and trends, allowing them to proactively address potential vulnerabilities before they are exploited," he wrote. The stock's gained more than 27% in 2023. Capitalizing on AI should help Cloudflare become a dominant infrastructure that AI can operate on as companies work to funnel enormous amounts of data from "point to point." AI puts TurboTax-owner Intuit into the "cross-hairs" with its valuable data sets, MoffettNathanson said. But if Intuit, "can harness AI for the internal data that it currently has on small businesses, taxpayers and consumers broadly, this could be one of the most formidable and desirable data sets out there," according to analyst Jackson Ader. Both stocks have added more than 8% this year. Drawbacks of AI To be sure, other companies face potential AI-related obstacles. Chegg's jaw-dropping plunge on AI risks earlier this month ignited concern among investors over which companies face significant disruption from the latest technology revolution. The biggest risk is to companies operating on a per-seat or license-based subscription model, Auty said. AI could have "material downward impact" on the number of workers employed and related revenue, he wrote. NET YTD mountain Shares so far this year. More broadly, Auty noted that AI could also lead to overdependence on technology, job losses and potentially increase vulnerability to cyber threats, he said. The technology is "only as good as the data it is trained on" and could contribute to biases or inaccuracies, Auty added. On a company level, heightened AI-threat hunting could inhibit the need for incident response from companies like Crowdstrike. Even first movers like Microsoft face risks from AI use, including increased expenses and regulatory scrutiny and oversight, Auty wrote. Part of the bear case revolves around AI's high cost, said Auty. "Aggregating and moving data sets into the models for training is another key element, as is the uploading of data, analysis and return trip of results from an AI model," he said. "The monetization models are still being developed, so the long-term margins are still not clear." — CNBC's Michael Bloom contributed reporting