Look beyond the mega caps for future AI investment wins: Amundi

The relentless advance of generative artificial intelligence (GenAI) technologies has led to unprecedented growth in US ‘mega cap’ and the bigtech stocks – whose value has surged more than 300% since 2019. These stocks, however, may be reaching their peak, warns European investment giant Amundi, with investors urged to factor in a potential reset of tech sector valuations, as the winners and losers of the AI arms race begin to emerge.

The huge outperformance of these tech giants over the last 12 months, with a particular nod to the ‘magnificent seven’ stocks (Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla), has led to extreme market concentration.

The investment group, in its newly released The Artificial Intelligence revolution: sector perspectives report, argues that with significant earnings growth expectations already priced in for these ‘bigtech’ firms, “the rest of the market could benefit from a broadening of the rally beyond the mega caps”. Concerns were also raised about the sustainability of US AI tech providers’ growth and profitability.

Amundi predicts that, by the second half of this year, the broader market’s earnings growth may cross that of the tech sector.

“The vast majority of AI GPUs are being sold to a few leading cloud hyperscalers, which are producing their own chips in an attempt to reduce costs (a GPU costs approx. USD 30,000). Also, the end customers across a variety of industries require an acceptable return on investment (ROI) on their AI spend.

“If this is not achieved, these businesses may slow down their spending, thereby dampening the AI tech providers’ growth and profit outlooks.

“With that in mind, we may see a reset of some of the valuation levels of the US tech companies.

The winners, ultimately, look to be those who can find a neat home for AI technologies in their back-office operations or to transform customer experience.

Picking winners in the next phase of

For a company to be a ‘winner’ in this AI arms race, writes Amundi group CIO Vincent Mortier and Amundi Investment Institute head Monica Defend, not only do they need to be an early mover investor in the technology, “but also possess a proprietary data advantage, an existing competitive edge based on market position, and an ability to innovate successfully”.

“Otherwise, any advantages from using AI technologies could be competed away,” the pair wrote.

These future winners are most likely to be found among the existing competitively advantaged companies, from those who realise meaningful impact from AI beyond either tech enablers or suppliers – such as the software and services, media and entertainment, commercial and professional services and industrials sectors.

These future winners, the pair said, are most likely to be found among the existing competitively advantaged companies.

These winners were grouped into four separate categories based on how AI is affecting their businesses: AI tech providers (such as semiconductor builders, providing the backbone technology of the AI revolution); AI tech enablers (such as hyperscalers/cloud providers, data centres, creating the infrastructure that supports AI software systems); AI deployers (those investing in AI to enhance their business models); and AI disruptors (those new entrants in market using AI to disrupt business processes).

As the ‘early-winner’ semiconductor sector hits a tipping point, Amundi, in particular, sees attractive investment opportunities from the AI deployers segment.

“A broadening of AI monetisation [will] emerge in 2025/2026, [with] companies… seeking a competitive advantage by spending across customer management, marketing and sales, software development and R&D”.

Among the companies expected to gain from their GenAI adoption in the medium term are software and services businesses, including SaaS and managed services providers, as well as entertainment and media providers.

For instance, cloud providers and software developers will contribute to the data modernisation and cleansing process necessary for the successful deployment of GenAI. Security vendors will also be critical to protecting these corporate “crown jewel” digital assets.

“On the revenue front, we expect software companies to improve the value delivered to customers through the use of AI (e.g. increase automation, assist in completing tasks and discover new elements within platforms).

“This should result in some additional pricing power as customers will be deriving greater value from the apps and achieving more efficiencies. This will only be the case, however, if the applications are not commoditised over time, and eventually provided for free.”

However, Amundi cautioned that client enthusiasm for GenAI, is being tempered by boardrooms’ hesitance to approve large AI budgets, “given the uncertainty about the way AI will be used as well the costs and returns from AI investments”.

In the media and entertainment space, which includes advertisers, Amundi notes that businesses that are already investing heavily in AI technologies are expected to realise efficiency gains over the next 24 months, resulting in accelerating growth rates in the near term.

Over the medium to long-term, financial services businesses (though “only those… that have an existing competitive edge and are early movers in terms of AI investing”) and healthcare are expected to gain considerably from AI deployments – however, the long-term outcome for growth and margins remain uncertain.

“In the long run, the costs of training models, regulations and cloud computing limitations may erode the AI advantages of many banks, leading to a concentration of value among the earliest adopters and strongest institutions,” wrote Amundi’s head of European equity research, Ciaran Callaghan.