Implications of AI for cloud computing companies

A key beneficiary of the AI boom

Cloud computing

Artificial intelligence: Peak hype?

It is no secret that the potential of artificial intelligence (AI) has been a key driver of equity markets over the past year. The market loves a good story and this is backed by positive earnings momentum and rising stock prices, creating a powerful narrative. Nevertheless, the extent of AI’s influence over market returns might still be surprising.

The ‘magnificent seven’ group of mega-cap technology companies which are perceived as some of AI’s key beneficiaries (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla) drove almost 60% of the US equity market’s total gains through 2023. This has left the market near its most concentrated in history, with the largest 10% of its stocks making up almost 75% of its capitalisation (as of February 2024).

For context, this exceeds the levels seen during the ‘dot-com’ boom, when hype surrounding the long-term potential of the internet was at its peak. Measured in other terms, the 'magnificent seven’s' dominance has left its market capitalisation above that of the entire Chinese stock market, despite the Chinese market being more than twice as profitable.

This situation has not gone unnoticed by companies like Alphabet, which are now cautioning that the market hype surrounding AI may have gone too far in the near term.

The economic benefits of new technologies like AI can be extrapolated quickly, but in practice may take many years to reflect in corporate profitability.

This could easily be the case with AI, particularly given the social, political and regulatory scrutiny currently being placed on technology companies around the world.

As with any new technology, it is not clear how things will play out long term. We see some comparisons between the current market backdrop and that of the 'dot-com' era; many hot AI stocks might follow key 'dot-com' names like Amazon to become very successful companies, but not all of today’s big AI names will be the winners of tomorrow – some will fail.

Rather than following the hype, it is therefore better to determine areas where AI will be able to deliver real improvements in the near term, even if they might not be obvious (and ideally where they are not priced into markets).

Cloud computing: A key AI beneficiary

Despite the investor hype surrounding AI manifesting largely within the magnificent seven companies’ high valuations, as the technology continues to advance its integration will become a game-changer for a broader array of companies across many industries.

At the forefront will be cloud computing, where many businesses are able to leverage its benefits using their existing expertise and access to vast technological resources.

Indeed, some cloud companies are already leveraging AI to improve decision-making and acquire further competitive advantages over their less-innovative incumbent competitors.

For example, AI can allow cloud service providers to develop automatic processes that analyse large volumes of data to predict demand and allocate resources accordingly. This can reduce the need for manual intervention in areas like server monitoring, maximising performance and minimising downtime.

In turn, this can allow them to scale their infrastructure dynamically to meet the fluctuating demands of their customers, which can improve their operational efficiency and reduce their costs. It is well known that companies are already using AI chatbots to enhance customer support via instant 24-hour assistance while also reducing staffing costs.

However, this is just the tip of the iceberg. They are also leveraging cutting-edge AI technologies in such as machine learning to develop intelligent solutions that adapt to user behaviour and provide more personalised experiences.

Cybersecurity is another AI hotspot where threats are become increasingly sophisticated; it can be used to help detect and prevent potential attacks in ways which humans may overlook.

The technology has numerous applications and, as a result, it provides another important tailwind for the ubiquitous adoption of cloud computing technologies across all sectors of the economy.

Fidelity Cloud Computing UCITS ETF

The Fidelity Cloud Computing UCITS ETF provides investors with a transparent, cost-effective means of gaining diversified passive exposure to the cloud computing theme (characterised by the delivery of computing services over the internet, including cloud infrastructure, platforms and software providers).

Its investment objective is to provide a net total return which reflects that of the Fidelity Cloud Computing ESG Tilted index, which is itself formed through the identification of companies with high-purity exposure to the theme via analysis of revenue data and the use of natural language processing to analyse large amounts of public and proprietary natural language data.

It also applies quality and ESG screens to help avoid stocks which may represent high levels of idiosyncratic risk, with the goal of providing the exposures our clients require.

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This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.

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