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AI Industry Expected to Soar

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Artificial intelligence (AI) continues to dominate the tech landscape, with UBS analysts predicting another remarkable year for the industry. Following the technology’s hype-driven surge in the stock market in 2023, the analysts are now forecasting a 40% revenue increase for the AI sector.

Led by Sundeep Gantori, the UBS analysts have revised their revenue estimate for the AI industry, projecting an impressive $420 billion in revenue by 2027, up from their previous projection of $300 billion. These numbers indicate a compound annual growth rate (CAGR) of 72%, starting from a baseline revenue of $28 billion in 2022.

According to UBS, the semiconductor and software industries are poised to capitalize on the AI wave in 2024. Both sectors are expected to experience robust double-digit profit growth, with operating margins exceeding 30%, as highlighted by Gantori.

While some predictions suggest that the benefits of AI will extend beyond hardware suppliers, positively impacting various industries like retail and finance, Gantori’s team believes that the semiconductor industry will remain at the heart of this boom, at least for now.

The UBS analysts anticipate that the graphics processing unit (GPU) and chip segment will be primary beneficiaries of the soaring AI spending. Specifically, they estimate a 60% CAGR between 2022 and 2027 for this segment, projecting an increase in annual revenue from $15.8 billion to $165 billion during this period.

Though the analysts do not mention any specific stocks, these figures are undoubtedly promising for Nvidia. As a dominant player in GPUs used for training AI models, Nvidia is well-positioned to benefit from this growth. Moreover, the substantial scale of this growth suggests that multiple winners can emerge, potentially benefiting Nvidia’s competitors like Advanced Micro Devices and Intel.

The AI industry is on an upward trajectory, and as we move further into the future, all eyes will be on its continued growth and the numerous opportunities that lie ahead.

The Shifting Demand for AI Chips: A Promising Future for Edge Computing

The latest figures from UBS reveal an interesting trend in the demand for AI chips. While processors used for training models accounted for 90% of the AI chip demand in 2023, experts predict a significant shift towards inference in the coming years. Inference refers to the process of generating answers or results from AI models. By 2025, it is estimated that inference will represent 20% of the total AI chip demand.

This shift presents a unique opportunity for companies specializing in edge computing. Edge computing refers to performing AI inferencing on devices themselves, rather than relying on cloud-based solutions. Notable players in this space include Mobileye, an autonomous driving systems company, and Qualcomm, which aims to power generative AI applications in mobile devices and personal computers.

According to Gantori and colleagues, the potential revenue from AI edge computing devices could reach $30 billion in the next 5-10 years. While this represents a low single-digit share of the overall semiconductor industry revenues, it may prove to be a conservative estimate.

But what does this mean for AI software providers like Microsoft and Google-parent Alphabet? While they are expected to benefit from the increased demand for AI, UBS analysts believe that the software industry may experience a slightly lower boost compared to the semiconductor industry this year.

UBS analysts are optimistic about the future of semiconductors, projecting strong pricing tailwinds in 2024. This, in turn, is expected to translate into a 25% revenue growth and over 50% operating profit growth for semiconductor companies. On the other hand, software providers can anticipate mid- to high-teen percentage revenue growth in 2024.

In conclusion, the demand for AI chips is undergoing a significant shift towards inference. This presents a promising future for edge computing, with potential revenue reaching $30 billion in the coming years. While both semiconductor and software industries stand to benefit, the semiconductor industry is expected to have a more substantial growth rate in the near future.

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