AI beyond the hype, a potential breakthrough in health tech, a near-term opportunity in PCs and more trends in technology and beyond.
The technology, media and telecom sector is vast, ranging from household names to business-to-business services providers. But the one thing that unifies this diverse group of companies is that they are all grappling with the impact of artificial intelligence, including how it will disrupt the technology ecosystem and its impact on markets and economies.
In this roundup of the latest sector trends, Morgan Stanley Research analysts give their insights into key themes for generative AI, the demand for cybersecurity services, the opportunity among PC makers and more.
The buzz about artificial intelligence has only gotten louder as natural-language chatbots have demonstrated impressive capabilities, offering a multitude of applications. Both business leaders and investors are asking how and where AI could disrupt existing technologies and industries. In particular, “generative” AI – which can generate content, such as text, audio and images—has significant potential to plug into new and existing products. As a result, Morgan Stanley Research analysts think that the current excitement could be more than just hype. “When we consider tech diffusion with real market impact potential, generative AI is a serious contender,” says Edward Stanley, Morgan Stanley’s head of thematic research in Europe.
Disruption to search engines has been a top area of conversation. For now, Morgan Stanley analysts don’t think recent AI breakthroughs will upend the status of the top search providers. Currently, the cost of running search queries with the leading generative-language AI app is seven times higher than the leading paid search option, due to computing intensity. “The key concern is how much current leaders in the space will have to pay up to make their in-house AI competitive,” says U.S. internet analyst Brian Nowak. “Companies are continuing to ramp up AI investments, which could give an advantage to the leaders with more ability and willingness to invest.”
Although new product launches show that incumbents may be up for the challenge, some investors are already looking for the next thing. The top 10 highest-valued private companies offering generative AI have a collective value of roughly $30 billion, a level already too rich for some venture capitalists. As a result, many VCs are shifting their focus toward AI applications aimed at content moderation.
Another big question about the current generative applications of AI is how they will disrupt white-collar jobs. In the C-suite, high hopes for cost savings – for instance, by using generative AI to write customer emails or create images for marketing materials– are being tempered by the high price per character output. Furthermore, required hardware upgrades need more than a year’s lead time in some cases. Accuracy is another issue; the manual validation required for AI content-creating tools should limit disruption since humans are responsible for such tasks for the time being. “In the long term, the degree to which AI can enhance productivity or reduce costs remains to be answered from an economics perspective,” says Nowak.
Monitoring blood glucose without probing the skin seems like a futuristic dream. But reports of a recent breakthrough involving blood monitoring technology using lasers to detect and algorithms to calculate an individual’s glucose coincide with the increasing functionality and popularity for wearables, says Erik Woodring, who covers U.S. IT Hardware. Currently, blood glucose monitoring involves testing drops of blood or tiny sensors under the skin that measure levels in the fluid between the cells. With more than 500 million people globally suffering from diabetes and hyperglycemia, the technology, if successful, could bring a non-invasive solution for millions of people in need of the essential medical diagnostics.
Non-invasive health monitoring is of significant importance to patients, providers and policymakers alike. While these technologies need to develop further before they become viable, with size and transportability especially important, tech companies getting into the space could be at the beginning of a game-changing cycle. “Disruption will likely take time, but given the potential for displacing traditional diagnostics device makers with large market share, we will continue to watch this technology and its speed of miniaturization, says Stanley.
Personal computer makers have a glut of inventory, and weak economies in the U.S. and Europe have consumers and businesses alike pulling back on PC spending. The result: the lowest shipment of computers in more than a decade and a half. “Despite attempts by PC manufacturers to offer deep discounts to stir demand, we expect 249 million shipments to reach end users in 2023, the lowest annual PC run rate since 2006,” says Woodring.
The prolonged weak demand is expected to shrink the PC market to $206 billion, 26% below the 2021 peak but still 7% above pre-COVID levels. And the pain is expected to ripple among application services providers, whose stocks could be down 3% versus 2022. However, if patterns from past down cycles hold, a window for getting positive on PC original equipment makers may be nearing. “We believe a bottom for the PC market is likely in within the next quarter, but estimates will have to come down before entry points emerge and we’ll keeping an eye on channel inventory for a clearer call,” says Woodring.
Consumers are clutching their pocketbooks, and internet companies are feeling the pinch (see chart below). Amid a tough macro backdrop, investors should note companies that continue to reach for cost savings, including through job cuts, to protect cash flow. Despite the slower growth for e-commerce and online advertising expected this year in the U.S., analysts say mega-cap stocks could emerge stronger in 2024 and beyond.
Analysts expect online advertising to grow 6% and e-commerce to grow 5% after years of higher demand during the pandemic.
Media: Investors may find opportunities in streaming leaders amidst slowdowns in advertising and direct-to-consumer subscriber growth as content costs continue to rise.
Technology: Business and capital allocation risks are largely priced in, and feedback from companies on spending priorities indicate more opportunity in software than in hardware.
Wireless: A modest slowdown in additions to postpaid mobile phone subscribers, continued competition from cable and significant divergence in trading prices among larger players means investors should focus on names that have scale advantage and higher free cash flow to debt ratios.
Cable: Broadband-wireless bundling, along with higher levels of investment spending, are expected to counter deceleration in growth.
For more Morgan Stanley Research insights and analysis on the future of AI and other themes in tech, media and telecom, ask your Moran Stanley representative or Financial Advisor for “AI—The Coming of Age” (Feb. 9, 2023) and “Orchestrating new IG TMT Scores” (Jan. 5, 2023).