The Transformative Power of Generative AI: Insights from RBC Capital Markets

October 15, 2024
Frédérique Carrier
Managing Director, Head of Investment Strategy, RBC Europe Limited

Artificial intelligence (AI), particularly its latest evolution known as generative artificial intelligence (GenAI), is poised to revolutionize the way we live, work, and interact. In a recent Global Insight Special Report titled “Generative AI: Enablers and Adopters,” we examined the burgeoning landscape of GenAI and its surrounding ecosystem. This article delves deeper into the specific impacts of AI and GenAI across various industries, highlighting their potential to not only reshape existing sectors but also to create entirely new ones.

Technology Businesses

Software

RBC Capital Markets posits that software and internet companies are at the forefront of a transformative wave driven by GenAI. This technology presents both enticing opportunities and heightened risks, particularly concerning cybersecurity.

Revenue Growth and Pricing Power

Companies that effectively leverage GenAI technology are likely to experience accelerated revenue growth and improved profit margins over the next three to five years. A key driver of this growth is improved pricing power. Software vendors are increasingly offering standalone GenAI products, leading customers to invest in solutions that promise enhanced returns on investment. For instance, Microsoft’s Copilot integrates GenAI into its suite of products, catering to individual users and businesses alike. As of Q2 2024, GitHub Copilot had attracted 1.3 million individual subscribers and over 50,000 business subscribers, demonstrating the demand for such innovations.

Enhancing Developer Productivity

GenAI is also set to revolutionize software development by significantly enhancing developer productivity. A recent study by McKinsey & Company suggests that developers can complete coding tasks up to twice as quickly when utilizing GenAI tools. This efficiency is expected to lead to faster product launches and improved return on investment. However, human oversight remains crucial to ensure code quality and security.

Automation of Customer Service

Moreover, GenAI enables the automation of basic tasks in customer service and data collection. This shift allows companies to optimize their cost structures and reallocate human resources to more strategic roles, ultimately enhancing corporate profitability.

Cybersecurity Considerations

While GenAI offers numerous advantages, it also raises significant cybersecurity concerns. The National Cybersecurity Center (NCC) warns that AI will likely exacerbate the volume and impact of cyberattacks in the coming years. The accessibility of AI tools has lowered barriers for novice cybercriminals, increasing the global ransomware threat.

Internet Companies

For internet companies, GenAI is set to have a profound impact on digital marketing. It promises to transform content creation across various channels, from text to video, while enabling deeper analysis of technical issues. Personalized platforms powered by GenAI, augmented reality, and virtual reality are expected to create entirely new user experiences. For example, a virtual personal shopper could utilize augmented reality to show customers how clothing items would look on them in real-time, tailoring recommendations based on their online behavior and past purchases.

Energy, Utilities, and Infrastructure

Growing Energy Demand

As the demand for AI and GenAI services surges, so too does the need for energy. Data centers, which are essential for supporting these technologies, require substantial computing power and energy. The proliferation of these facilities is driving a rapid increase in power consumption, presenting opportunities for various industries.

Natural Gas Power Generation

RBC Capital Markets anticipates that natural gas will play a crucial role in meeting the energy demands of data centers. Unlike renewable energy sources, natural gas power plants can quickly respond to fluctuations in electricity demand, making them essential for maintaining a reliable power supply.

Infrastructure Expansion

To support this incremental gas generation, there is a pressing need for capacity expansions in natural gas infrastructure. This includes enhancing pipelines and storage facilities, which have lagged behind demand growth in recent years. Companies with existing rights-of-way and expansion capabilities are well-positioned to capitalize on these opportunities.

Industrials

Electrical Solutions: Liquid Cooling

The rise of larger data centers has led to increased interest in liquid cooling solutions. As server racks generate significant heat, traditional air cooling systems are becoming less effective. Liquid cooling offers a more efficient and environmentally friendly alternative, with the market for these solutions projected to grow rapidly.

Aerospace and Defense

AI is also making strides in the aerospace and defense sectors. The U.S. Air Force is exploring the use of AI in uncrewed systems, enhancing battlefield capabilities while reducing costs. In commercial aerospace, AI applications range from intelligent factory automation to predictive maintenance, showcasing its versatility.

Automotive Innovations

In the automotive industry, AI is set to play a pivotal role in both advanced assisted driving systems and fully autonomous vehicles. Machine learning can enhance safety features and optimize driving performance, paving the way for a future where autonomous vehicles become commonplace.

Financial Services

Wealth Management

AI is a key theme across all segments of the financial industry. In wealth management, GenAI tools can augment financial advisors’ expertise, streamline communication with clients, and enhance service delivery. By automating routine tasks, advisors can focus on building stronger relationships with their clients.

Health Care

Improving Patient Outcomes

GenAI holds significant potential for improving healthcare outcomes at various stages of the patient journey. From self-triage and patient intake to clinical decision support and ongoing patient engagement, AI can streamline processes and enhance the quality of care.

Consumer Products

Personalization and Supply Chain Optimization

In the consumer products sector, GenAI applications can enhance personalization and improve supply chain management. For instance, L’Oréal’s Beauty Genius app demonstrates how AI can tailor product recommendations to individual consumers, significantly increasing sales conversion rates. Additionally, companies like Procter & Gamble are leveraging AI to optimize their supply chains, yielding substantial cost savings.

A Technological Tsunami?

The rise of AI technologies, particularly GenAI, is set to become a disruptive megatrend, transforming businesses across various sectors. However, the full potential of these technologies may take years to unfold. Challenges such as ensuring accurate responses and maintaining user data privacy will need to be addressed. Moreover, the high costs associated with GenAI may limit its application in certain areas.

As history has shown, investors often overestimate the short-term benefits of new technologies while underestimating their long-term impacts. As GenAI continues to roll out across industries, staying informed about its developments will be crucial for understanding its transformative potential in the investment landscape.