The AI Market Opportunity: UBS Offers a Bottom-Up Perspective
The launch of ChatGPT in November 2022 was a significant event in the world of artificial intelligence (AI), making AI a part of everyday life. UBS analysts say this launch has led to huge investments and technological advancements that could affect every economic sector.
In a recent note to clients, strategists at the bank highlighted that while AI adoption is just beginning, the potential for investment is enormous.
Focus on Key Players
"In the early stages of the AI era, we recommend investors focus on vertically integrated players across the AI value chain," they wrote, highlighting businesses that combine clear monetization paths with strong competitive positions.
The potential size of the AI market is staggering, with estimates ranging from Bloomberg's $1.3 trillion by 2032 to McKinsey's $4.4 trillion. UBS believes annual AI-related revenues could exceed $1 trillion over the next decade.
How AI Will Drive Growth
AI tools are expected to boost productivity, especially for the nearly 1 billion knowledge workers globally. For example:
- Developers using AI tools like GitHub Copilot can code up to 55% faster.
- Customer service operations could become 30-50% more efficient with generative AI.
UBS Investment Framework
UBS outlines an investment framework with three layers:
- Enabling Layer
- Intelligence Layer
- Application Layer
Enabling Layer
This layer includes the physical infrastructure, such as AI data centers, needed to train and run AI models. UBS projects annual capital expenditures for this layer to reach $331 billion by 2027, driven by investments in AI servers and data center infrastructure.
“Most of the value in the enabling layer is likely captured by AI servers,” UBS notes.
Intelligence Layer
This layer comprises generative AI algorithms and large language models that use the computing resources from the enabling layer. Although still in the early stages of monetization, this layer is expected to grow significantly.
“We expect this layer to show the strongest growth into 2027 given its small base,” UBS highlighted.
Application Layer
The application layer includes AI-powered software applications and services, which offer the greatest monetization potential. Though it is hard to quantify its full potential at this stage, this layer features tools like AI co-pilots for coding and personal assistants.
Examples:
- Microsoft’s GitHub Copilot: Generated over $100 million in revenue in 2023 and grew 40% year-over-year with 1.3 million users.
- With developer productivity gains of 50–60%, we expect an acceleration in the creation of software code.
Near-Term Opportunities
For the near term, UBS sees the largest opportunities in the enabling layer of AI. The bank also expects that the ratio of applications to the enabling and intelligence layers will imply limited bottom-line profitability for the application layer during the early stages of generative AI adoption.
