CONTRIBUTORS
Jonathan Curtis
Portfolio Manager
Franklin Equity
Preview
The rise of generative artificial intelligence (genAI) models and tools has ignited a firestorm of investor interest, mirroring the dot-com boom of the late 1990s and early 2000s. While the dot-com era witnessed a market correction due to unsustainable valuations and fragile, under-developed business models, bullish investors were right in the aggregate: the internet was poised to revolutionize many parts of our lives and unleash significant value creation in the markets.
Similarly, we think genAI holds the potential to profoundly impact many areas of our lives, dramatically increase the supply of innovation, start a new business cycle in the information technology (IT) sector, and power enterprise digital transformation for years to come. While there are undoubtedly many incorrectly valued businesses with underdeveloped business models in the market today, not dissimilar to the dot-com era, we believe something profound is underway with genAI and that investors should have exposure to this opportunity.
In this paper, we explore the transformative potential of genAI, the parallels with the dot-com era, proposes a framework for identifying long-term genAI winners, and outlines key investment considerations for navigating the opportunity.
Key considerations:
- GenAI: A profound transformation that is just beginning.
- There are echoes of the dot-com bubble, but with real value already being delivered.
- Identifying the genAI winners on the production and the consumption sides.
- Let's start with the infrastructure layer, then look toward the application layer.
- The GenAI road ahead: A call for agility and discernment.
Key Themes We Believe In
Exhibit 1: AI and ML Function as Step-Change Agents in Digital Transformation
March 31, 2024
Sources: UBS; Company reports, Franklin Templeton. For illustrative purposes only. The logos are registered trademarks of the companies that own them and are used for illustrative purposes only. The information provided is not a recommendation to purchase, sell, or hold any particular security and should not be construed as an endorsement of or affiliation with Franklin Templeton.
The lessons of the dot-com bubble teach us that while technological revolutions can generate immense value, not all trailblazers will emerge as winners. Due diligence is paramount. While there will undoubtedly be failures, the potential rewards are immense. And, contrary to what one might initially think, “progressive failures” are bound to spur innovation, resilience, adaptability and outside-the-box solutions as genAI’s paths to long-term adoption multiply.
By understanding the key drivers of success and adopting a prudent approach, and by owning a diversified portfolio of companies benefiting along the genAI value chain, we believe investors can capitalize on this transformative technology.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in healthcare, information technology (IT) and technology-related industries, carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security.
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