July 16, 2024

Unleashing the Potential of AI in Your Portfolio

JP Morgan: Leading the Charge in Banking Innovation

JP Morgan Chase, the leading world bank, has been at the forefront of AI adoption within the banking sector. Since hiring its head of AI research in 2018, JP Morgan has made significant strides in integrating AI across the company, and its investment in AI is substantial, with $12 billion allocated annually to fuel a team of 50,000 technologists. As a result, JP Morgan employs the greatest number of AI talent within the industry – nearly six times more than the average bank.

Jamie Dimon, JP Morgan’s CEO, has compared the potential impact of AI to that of the printing press and the Internet. In his annual letter to shareholders in April 2024, Dimon stated, “We are completely convinced the consequences will be extraordinary and possibly as transformational as some of the major technological inventions of the past several hundred years.”

JP Morgan’s Corporate & Investment Bank implements AI-driven machine learning to personalize the digital experience of the bank’s research platform, J.P. Morgan Markets, tailoring content to client needs. JP Morgan Chase is also the first major bank to use an AI-powered virtual assistant for corporate clients to enhance its customer experience by providing real-time balance inquiries and insightful recommendations based on user behavior. Furthermore, the company recently announced that all new hires are being trained in AI as they continue to establish themselves as a leader in the space.

Royal Caribbean: Charting New Waters with AI

In luxury cruising, passenger personalization represents the ultimate level of service. Royal Caribbean, a pioneer in the cruise industry and one of our core holdings, is spearheading this with artificial intelligence. Its AI-powered app acts as a personal assistant for passengers, aiding with activity scheduling, dining reservations, and navigation around the ship. By analyzing the psychology of passenger preferences and behaviors, AI allows cruise organizers to determine best-fit activities, maximize engagement, and create unique guest experiences.

While onboard Royal Caribbean’s Quantum ships, passengers can experience another standout feature: the Bionic Bar, where robotic bartenders powered by AI mix and serve cocktails. This fusion of technology and entertainment represents AI’s revolution in the cruise industry.

AI also optimizes ship operations and plays a critical role in navigation, as it analyzes weather data and ocean currents to plot the most efficient and safe courses. This intelligent navigation aids captains in making informed decisions to ensure safety and reduce fuel consumption. Additionally, AI-driven predictive maintenance systems monitor the condition of ship components, minimizing the risk of malfunctions and ensuring smooth operations.

The Walt Disney Co: Transforming the Magic with AI

Disney has long been synonymous with innovation, and its use of artificial intelligence in theme parks and across its media platforms is no exception.

At theme parks, AI-driven personalization customizes visitor experiences. Guests can influence the storyline of certain rides via their smartphones to create a new adventure every visit. Disney also incorporates AI into their animatronic robots and interactive experiences, allowing them to remember guests and the rides they have been on. By analyzing visitor preferences, past visits, and real-time decisions, AI can tailor experiences with attractions, shows, and character interactions aligned with personal preferences.

AI is also instrumental in improving operational efficiency and safety. Disney’s FastPass+ system uses AI to manage queues, reduce wait times, and enhance visitor satisfaction. Predictive maintenance systems anticipate mechanical issues before they occur, ensuring the safety and reliability of rides. AI-driven analytics also optimizes energy consumption and waste management, contributing to more sustainable park operations.

In the realm of media, Disney utilizes AI for contextual advertising on its streaming services. The “Disney’s Magic Words” tool analyzes and tags scenes, allowing brands to tailor their commercials to fit the mood of specific scenes, enhancing the effectiveness of advertisements. Lastly, in February 2024, The Walt Disney Company announced five new companies joining its business development Accelerator Program – not surprisingly, most focus on AI technology.

Looking Ahead

The integration of artificial intelligence by JP Morgan Chase & Co, Royal Caribbean Group, and The Walt Disney Company highlights the transformative power of technology across diverse industries. Bill Gates recently said AI “will utterly change how we live our lives online and off.” As artificial intelligence continues to evolve, these companies demonstrate how strategic investments in AI can lead to enhanced customer experiences, operational efficiencies, and innovative solutions.

Who Benefits from AI Demand?

AI at Noesis – The advent of artificial intelligence and data-driven solutions has undoubtedly revolutionized the financial advisory space. We now have access to numerous tools that can provide valuable insights and information. Technology like Gemini and ChatGPT can sift through vast data, identify key trends, and provide market insights, allowing us to analyze information quickly. We then use our own expertise to confirm accuracy. AI also improves our efficiency with operational tasks and even played a role in the initial draft of this newsletter. Although the ideas, research, and voice are our own, the technology helped create the initial framework. As we move forward, it is not about AI replacing the human touch but about the strategic integration of technology to amplify our capabilities. Human expertise, insightful thinking, research analysis, and relationship building will remain invaluable.

AI in Our Personal Lives – AI has already enhanced various aspects of our lives by making daily tasks more convenient and efficient. AI-powered wearable devices monitor vital signs, providing insights into health trends and alerting users to potential health issues before they become serious. AI algorithms on platforms like Netflix and Disney analyze user preferences and viewing habits to make tailored content suggestions, whereas AI-driven voice assistants like Siri, Alexa, and Google Assistant help manage schedules, answer queries, and control smart home devices like AI-automated thermostats, lights, and even coffee machines. You have probably asked AI chatbots on customer service platforms to resolve issues and used navigation apps to provide the most efficient routes using real-time data. AI has even streamlined the customs and immigration process at airports by using facial recognition and other biometric technologies to quickly verify identities, reducing wait times and enhancing security.

AI’s Challenges & Opportunities

Challenges – Before the benefit of AI started to be felt in daily life, the number of fraudulent activities had already increased exponentially. Emails and text messages can be faked, and voice, image, and even video can be fabricated with near-life accuracy. The same goes for many inventions created in the past; depending on who has access to the tools, it might cause more headaches for society and certain businesses. Take our industry for example: cybersecurity has become the top priority of all compliance issues. We must regularly upgrade our software and hardware to the highest security standards to protect our clients’ data, and our employees complete weekly cybersecurity trainings to learn about the newest threats. Verbal verification for monetary transactions is standard practice and could soon be elevated to visual verification.

Another area of concern is the flattening of the competition landscape. The friendlier interface of AI generative chatbots enables access to AI tools for users without advanced degrees or training. Take software coding for example: entry-level programmers can have chatbots complete their work without learning the required coding techniques. General research tasks can be reduced to just a few typed lines in the search box. If there are no add-on efforts by the end users, many final works can become similar. Providing differentiated products and services will prove to be more challenging and costly for individuals and businesses.

Another risk is the authenticity and the availability of input data. Since AI models are based on existing data, the results are less meaningful if data is insufficient or inaccurate. Manipulated data can influence the results to achieve the target impact. Since AI modeling does not work linearly, more like a black box, it makes tracking errors equally complicated. Therefore, eradicating incorrect data could be nearly impossible once entered into the system. Our Research Team also read about the unimaginable consequences of AI models run on AI-generated data. For example, Grok – the AI chatbot by X (formerly Twitter) – created a fabricated story in April about Iran attacking Israel. The social media site X then promoted the false AI-generated headline in its trending news section.

Opportunities – In the early stage of AI evolution, which is where we are now, hardware, especially the crucial components that dictate computing speed, will benefit the most. Data centers must expand their capacities, including servers, networking, cooling systems, and power generation. The direct beneficiaries among our core holdings are Taiwan Semiconductor, Qualcomm, Amphenol, Caterpillar, and Cummins. However, not all hardware companies are created equal; some popular ideas have little business moat despite growing fast. One easy metric to examine the moat is the operating margins. A low margin indicates a high level of competition and a low barrier to entry. In turn, this means the current earnings power due to the AI demand is not sustainable long-term.

Software and platform companies are exposed to the AI trend differently depending on their core technologies and target markets. One thing not to ignore is the customer data they collect, as data is the base of all AI models. Alphabet (Google), for instance, has the world’s most extensive search history, online advertising click-through information, map and geographic libraries, and video viewership database. Its capability of designing its infrastructure, including chips, servers, data centers, and the immense data harnessed, enables it to maintain a wide business moat.

Other industries can benefit from AI by introducing products and services faster and more precisely. For example, pharmaceutical and biotech companies can design clinical trials using AI’s help by choosing a better-fitted patient pool or a more effective therapy combination. Consumer companies can create personalized offerings based on AI’s analysis of individual preferences, resulting in increased customer loyalty.

Conclusion

Some have equated the impact of Generative AI to the introduction of the Internet or smartphones. Investors are quickly on board with the AI trend even though it remains debatable whether Generative AI will change human behavior as profoundly as the other two. Over the years, we have discussed various trends in length, and our philosophy of dealing with them is no different this time – we conduct research on industries and companies and then invest in high-quality businesses at a reasonable price.

May you and your family have a wonderful summer!

Sincerely,

Your Noesis Team