It shouldn't be any surprise that Microsoft (MSFT 2.22%) co-founder Bill Gates continues to follow the advancements in artificial intelligence (AI). The technology has been around for decades, and Gates was aware of its potential back when he still ran the company. He has always been fascinated by the potential of AI and its algorithms to make our lives easier.
At the same time, Gates still acknowledges that "software is still pretty dumb." While users can interact with software to accomplish a large and growing variety of tasks, it still falls far short of a real person's ability to comprehend.
However, in his personal blog this month, Gates said the way we use computers will undergo a dramatic shift over the coming five years and "will utterly change how we live." The catalyst for this shift? AI-powered digital agents.
Image source: Getty Images.
Increased productivity is just the beginning
Recent advances in generative AI have kicked off something of an AI gold rush. Microsoft recently released Copilot, a digital assistant that is deeply integrated with Word, Excel, and other software programs, while Alphabet's (GOOGL 0.37%) (GOOG 0.32%) Google has launched Bard.
These next-generation systems have the ability to not only create content from scratch but also increase productivity by automating certain processes. These advanced algorithms can summarize emails and draft responses, generate updates from meetings, create slideshows from existing documents, or even write or debug computer code.
Gates thinks this is just the beginning of what advanced AI agents will be able to achieve in the coming years:
If you have an idea for a business, an agent will help you write up a business plan, create a presentation for it, and even generate images of what your product might look like. Companies will be able to make agents available for their employees to consult directly and be part of every meeting so they can answer questions.
Beyond business uses, Gates believes these digital agents will also be deeply ingrained in our personal lives. They will remind us of birthdays and help us choose gifts, let us know if our flight is delayed, and even schedule a get-together with friends.
That's not to say there won't be challenges. A couple of the biggest concerns will be privacy and security. Users will need to implement certain safeguards to ensure that their personal information isn't compromised or left open to abuse.
How to profit from this paradigm shift
It's still too early to tell what companies will be the ultimate winners in the race to create these digital agents. It could be a promising start-up, a familiar big tech name, or even a company that's still on the drawing board.
That said, Gates himself mentioned a couple of potential winners in the space.
Microsoft is currently at the forefront of this trend as a result of its prescient investment in ChatGPT creator OpenAI and quick integration of generative AI tools into its software-as-a-service (SaaS) offerings. The company is charging roughly $30 per user per month for Copilot, which will add up quickly. Microsoft CFO Amy Hood said, "The next-generation AI business will be the fastest-growing $10 billion business in our history."
While no one knows for sure how large this opportunity will ultimately be for Microsoft, Evercore ISI analyst Kirk Materne suggests AI alone could generate $100 billion in incremental revenue for Microsoft by 2027.
Gates also specifically called out efforts by Alphabet to stake its claim in the AI revolution. Not only did the company debut Google Assistant with Bard, but it also infused AI functionality into a broad cross-section of its Workspace tools, including Google Docs, Sheets, and Slides. Furthermore, Google has nine namesake products with more than 1 billion users each, and the company is integrating AI technology into many of them.
One that Gates didn't include, but bears mentioning nonetheless, is Nvidia (NVDA 3.46%), perhaps the most obvious winner over the near term. The company's graphics processing units (GPUs) proved indispensable -- at least thus far -- for processing the mounds of data necessary to train and run these AI systems. While rivals have tried diligently for years to come up with a better solution, Nvidia's graphics cards still reign supreme.
The chips use parallel processing -- or the ability to run a multitude of complex mathematical computations simultaneously -- which provides the computational horsepower necessary to handle the rigors of AI. During Nvidia's fiscal 2024 second quarter (ended July 30), the company generated triple-digit growth and forecasts an even better performance for the coming quarter.
The fine print
To be clear, progress in AI has been fast and furious. Investors will need to watch the space closely for developments that could alter the balance of power.
Of the three companies mentioned, Alphabet has the most compelling valuation, selling for just 23 times forward earnings, a discount to the price-to-earnings ratio of 24 for the S&P 500. Nvidia and Microsoft sell for 44 times and 33 times forward earnings, respectively.
That said, given that each is at the forefront of a powerful secular trend, I would argue that all three stocks are deserving of a premium valuation. I believe that Nvidia, Microsoft, and Alphabet are all buys, but because of their lofty valuations, they simply won't be for everyone.
