Public

Artificial intelligence
Sizing and seizing the investment opportunity

GWM Chief Investment Office

Ulrike Hoffmann-Burchardi, CIO Global Equities

Linda Mazziotta, CFA, Strategist
Nikolaos Fostieris, Strategist

29 August 2024

This report was prepared by UBS Financial Services Inc. and UBS Switzerland AG.
Please see important disclaimers and disclosures beginning at the end of this document.
UBS CIO AI Views

1 AI will be the most profound innovation and one of the largest investment opportunities in human history

The ratio of monetization potential of the AI application layer to the costs of the enabling and intelligence layers
2 will become a key metric for investment returns

3 AI will kick off a data center capex cycle that will dwarf general purpose data center capex in the next years

4 The AI silicon moment: AI chips will capture a large part of the AI value creation

5 The AI enablers will be the first adopters of AI, driving both revenue and margin upside

Monolithic players will emerge along the AI value chain and over time, the AI market will be dominated by an
6
oligopoly of vertically integrated “AI foundries”

7 Software will become ubiquitous

8 Data assets will emerge as the competitive differentiators for AI adopters

9 Despite the increasing number of new open-source models, proprietary models will remain the top performers

10 The application and intelligence layers will merge with artificial general intelligence (AGI)

Source: UBS, as of Aug 2024

Please read important disclaimer at the end of the document. 1
CIO View 1
AI will be the most profound innovation and one of the largest investment opportunities in human history

Value creation in past cycles

Real US GDP per worker during innovation cycle, USD

+15.7% +17.9% +26.8% +16.8% >+30%?

140,000

90,000

40,000
1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 2019

1964-1981 1981-1993 1993-2007 2007-2022 2022-?

Mainframe era PC era Internet era Mobile era AI era
IBM System/360 IBM 5150 The World Apple Iphone ChatGPT
Personal Wide Web
Source: Bloomberg, UBS estimates, as of June 2024
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CIO View 2
The ratio of monetization potential of the AI application layer to the costs of the enabling and intelligence layers will become
a key metric for investment returns
The AI market opportunity:
a bottom-up perspective

Source: UBS estimates, as of June 2024

Please read important disclaimer at the end of the document. 3
CIO View 3
AI will kick off a data center capex cycle that will dwarf general purpose data center capex in the next years

Annual capex for the enabling layer is expected to grow significantly by 2027
Split of estimated data center (DC) capex between AI and general purpose data centers, in USD bn and as a % of total

450 75% 80%

400 70%
350 60%
99
300
50%
250
40%
200 30%
30%
150
100 20%
127
50 10%
55 297
0 0%
2023 2027E
AI DC (LHS, USD bn) General purpose DC (LHS, USD bn) AI DC capex as % of total DC capex (RHS)

Source: UBS estimates, as of Aug 2024. 4

Please see important disclaimer at the end of the document.
CIO View 4
The AI silicon moment: AI chips will capture a large part of the value creation

Over 70% of the bill of materials of an AI server is made up of GPU costs.

This makes it the largest beneficiary, followed by memory and interconnects, which make up 15% and 9% of the total
costs, respectively. Representative AI server bill of materials, item categories, in % of total

Storage, 1%

GPU: 74%

CPU: 1%

Interconnects: 9%

Memory/DRAM:
15%

Source: Dihuni.com, with UBS inputs, as of May

Please read important disclaimer at the end of the document. 5
CIO View 5
The AI enablers will be the first adopters of AI, driving both revenue and margin upside

We expect margin expansion for enablers of genAI, such as hyperscalers, as they capture revenue from AI
products and productivity gains

Average profit margin of select AI chip companies and cloud hyperscalers, in %

35
30
25
20
15
10
5
0
2014 2016 2018 2020 2022 2024

Source: Bloomberg, UBS, as of June 2024. 6

Please see important disclaimer at the end of the document.
CIO View 6
Monolithic players will emerge along the AI value chain and over time, the AI market will be dominated by an oligopoly of
vertically integrated “AI foundries”

With an attractive margin structure along the value chain, it is likely that an increasing number of companies will
try to expand into different segments of the value chain
Positioning of well-known IT firms across the AI value chain

Company Enabling layer Intelligence layer Application layer

Chips Cloud

Google TPUs GCP Gemini (formerly Bard) Duet AI, Advertising

Microsoft Maia Azure Open AI (investment) Github, Office Co-pilot

Amazon Trainium, Inferentia AWS ? Chat bot recommendations

Meta MTIA ? Llama Advertising
Nvidia GPUs DGX ? ?
Tencent ? Tencent Cloud Hunyuan Advertising
Baidu ? Wangpan Ernie Baidu Comate
Alibaba ? Aliyun Qwen Qwent-Agent
Huawei GPUs Huawei Cloud PanGu PanGu Drug Molecule Model

Source: UBS, as of June 2024

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 CIO View 7
Software will become ubiquitous

Productivity gains in coding development will accelerate the creation of software code
Total number of GitHub repositories*, assuming a growth rate 55% higher than the previous 5-year average

800 Impact of co-pilots?

600

400

200
Education EnergyEnergy management
Personalized training, and predictive maintenance
0
2016 2017 2018 2019 2020 2021 course 2023
2022 2024 2025 2026
recommendations
* centralized storage locations for data, code, models, and other resources

Source: GitHub, UBS, as of June 2024 8

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CIO View 8
Data assets will emerge as the competitive differentiators for AI adopters

Proprietary data is a strategic asset.

Data from ….gives the ability to
Google Waymo Millions of miles of autonomous driving improve AI algorithms for navigation and safety

Amazon Customer transaction history, reviews, optimize machine learning services, provide AI tools to its
software and infrastructure use customers

Microsoft Data from Office products (Outlook, optimize its AI offerings (natural language processing,
PowerPoint, Excel, Word) computer vision, machine learning tools)

Meta Data on user activities on its platform deliver personalized advertisements aimed to resonate with
(e.g., likes, comments, time spent) individual users

Apple Users’ health and fitness data, app develop advanced health and fitness tracking features,
usage data providing users with personalized insights and
recommendations
NVIDIA GPU performance, customer optimize its AI hardware and software solutions, make them
applications more efficient for deep learning and other AI tasks

Source: company websites, UBS, as of June 2024

Please read important disclaimer at the end of the document. 9
CIO View 9
Despite the increasing number of new open-source models, proprietary models will remain the top performers

The top performing models are closed source proprietary models as of Aug 2024. Increased capex for
foundational models will limit open-source competition.

Sources: Hugging Face, as of Aug 2024, A comprehensive overview of Large Language Models by Naveed et al, Feb 2024 10
Please read important disclaimer at the end of the document.
CIO View 10
The application layer and intelligence layers will merge with artificial general intelligence (AGI)

Single language models achieve above average scores across domain-specific exams
GPT-4 performance on academic and professional exams. Scores in performance percentile

100
80
60
40
20
0
Uniform AP Biology AP Macro- AP GRE Quant. AP Physics 2 AP Calculus
Bar Exam economics Psychology BC

GPT-4 GPT-3.5

Source: OpenAI, R. "GPT-4 technical report. arxiv 2303.08774." View in Article 2.5 (2023), UBS, as of June 2024 11
Please read important disclaimer at the end of the document.
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