AI podcast episodes

230. AI At The Frontier – A Stock Picker’s Take on Tech and AI investing

Episode Description:

The world of artificial intelligence continues to profoundly impact the stock markets and create investment opportunities. Despite a brief setback earlier this year, AI continues to push the boundaries of human ingenuity and drive market dynamics.

Oscar Pulido welcomes Tony Kim, head of the BlackRock Fundamental Equities Global Technology Team, and Michael Gates, lead portfolio manager of BlackRock's target allocation models. Fresh from their interactions with technology leaders in San Francisco and Silicon Valley, Tony and Michael share their insights on the rapid advancements in AI, the efficiencies it brings to the economy, and the promising investment opportunities it unveils across various sectors.

AI, AI Investing, Tech Investing, Technology Investing, Silicon Valley, Tech,

Sources: AI Scaling Laws and Market Structure, Anton Korinek, Professor of Economics, University of Virginia; Bloomberg data as of June 31^st 2025; The Complex Truth About AI Computing and Value, Wall Street Journal, March 2^nd 2025; Analysis based on BlackRock Global Technology evaluations and calculations; BlackRock and World Bank Group Data, World Bank estimates GDP around $111 trillion, Capital expenditure on AI infrastructure is estimated at around $400 bn.

Written disclosures in each podcast platform and each episode description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy and should not be construed as investment advice or investment recommendation of those companies.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

<<THEME MUSIC>>

<<TRANSCRIPT>>

Oscar Pulido: Artificial intelligence continues to claim the spotlight and test the limits of human ingenuity. And even after a brief setback early in the year, it continues to drive stock markets. As the technology evolves, so do the investment opportunities. So, where do the greatest prospects reside now and what are the risks?

Welcome to The Bid where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido.

Today I'm joined by Tony Kim, head of the BlackRock Fundamental Equities Global Technology Team, and Michael Gates, lead portfolio manager of BlackRock's target allocation models. Tony and Michael recently spent time with technology leaders across San Francisco and Silicon Valley, and today they reflect on the rapid pace of progress, the efficiencies AI is creating across the economy and the investment opportunities it is revealing across various sectors of the market.

Tony and Michael, thank you much for joining us on The Bid.

Tony Kim: Thank you. It's a pleasure to be here.

Michael Gates: Thanks, Oscar.

Oscar Pulido: Tony, this is one of our favorite episodes to do over the course of a year because this is where we talk about that tech tour where you take more than 30 BlackRock colleagues around Silicon Valley and San Francisco. In fact, I think you travel more than 300 miles over the course of five days to meet with the leaders of approximately 25 technology companies. So, it sounds like a busy week, and this is the 12th annual tech tour that you've hosted. When we talked about this tour last year, you mentioned that AI was really not much of a topic of discussion for the first nine years of that tour, but that that had started to change and that it became a very prominent topic of the tour. There's obviously been a lot of development in the AI space since we last spoke. So, tell us about those conversations that you had with industry leaders. How has it changed over the past year?

Tony Kim: Yeah, last year it was all about AI, but it was chatbots, the origins of agents. And this year, it was all about AI, but it was AI, what I would call at the frontier, at the edge of what is possible. Really, it's around super intelligence. So, we keep ratcheting up the capabilities of what these AI systems can do and we were looking at AI companies in the full stack, from everything from the infrastructure and the compute to the models, to the applications and now the extensions of AI into the physical world. It's still all about AI, but the scope has expanded materially.

Oscar Pulido: And that term ‘AI at the frontier’ does make it sound like a lot has changed in the past year and that it is more pervasive across different applications and the use case. One of the things that we did this year, again, Tony, is that The Bid team joined you on your tech tour and we were able to get some clips from some of the industry leaders that you met with. And so, on that topic of the rapid pace of change that we're seeing in AI, we want to hear from Jitendra Mohan, CEO and co-founder of Astera Labs.

Jitendra Mohan: The rate of change for AI is insane. It is the fastest pace of innovation that I've seen in my lifetime, arguably in anybody's lifetime. If you look at a couple of years ago, we had the ChatGPT movement and ChatGPT was impressive and magical, but it was still a novelty at the time. And look at where we are today: AI is writing code, AI is finding bugs, these models are able to do reasoning. And I'm pretty sure that there is a virtual AI agent or a physical AI robot in our near future.

Oscar Pulido: Tony, last year when we spoke we also talked about this concept of the technology stack. This is how you described sort of the investment opportunity set and you talked about these as three different layers of investment opportunities. At the bottom you said are the chips and the infrastructure, the middle stack is the AI intelligence layer, and then the top stack are the AI models, the software applications themselves. There's been a lot of, again, attention and focus on the infrastructure — that bottom foundational layer. So, things like semiconductors and data centers is what comes to mind. Is this still the primary investment opportunity or are the investment opportunities now branching out to some other stacks within that, in that foundation?

Tony Kim: This is a great question. I think this is the best way to interrogate AI. If we just look at these three layers: the compute and infrastructure, the intelligence and the models, and then the applications and services.

And so at the bottom of this stack, just the top spenders of physical CapEx is nearly half a trillion dollars this year. It will grow to trillion or more in the coming years. Just to put in context, the global GDP is $100 trillion, so just AI infrastructure is already 0.5%. This is just pure chip and data center investment, is already at half a percent of global GDP. This is the largest investment in human history. We're just in the early stages at that layer, and this continues. And the reason this continues, these are AI factories effectively, they then birth the intelligence. It is created based on how much compute you have. And this intelligence layer they are growing at exponential capabilities - 10 x or more of improvements per year tied to how much compute investment. The world has realized that if you have more compute, we get more intelligence. And so, this is this inexorable linkage between the compute layer and the intelligence layer, and that is giving birth to ever increasingly capable AI systems.

And so, those two are getting the lion's share of the investment, and we're seeing growth that we've never seen before. Companies like OpenAI and Anthropic are growing multiples faster than even Google at the dawn of the internet age. So, we are seeing, as Jitendra mentioned, growth that we've never seen before and the rate of change.

And then at the top layer is what I call the applications layer. And before I was really thinking about the software applications, and I think this is going to change dramatically because the AI will be writing the applications. But I would add one more piece. These AI systems will not just be software applications, but it will be merging software and labor and services together. And so, what we thought were these distinct industries, the capabilities of these AI systems will subsume into the application layer and the service layer. And the service layer is over roughly half or more of the global GDP. And so now you're starting to see the scope and scale of what is potentially coming with these advanced AI systems — it is expanding to bigger and bigger parts of the global GDP.

Oscar Pulido: That was the word that was going through my mind is the scale you mentioned $500 billion in terms of the investment, what it represents as a percentage of global GDP. You touched on some of the companies these days that are growing very fast and how that compares to technology companies of a few decades ago, and just the rate of change being so quick.

We want to hear from another one of the executives that you encountered on this tech tour. This is Sasan Goodarzi, the CEO of Intuit, who sees AI as a tool that could allow customers more time to focus on their real passions.

Sasan Goodarzi: Are there big hard problems that we can solve in ways where a customer never has to lift a finger in running their business, but do all of their finger lifting in what they're passionate about. And that's why I'm so excited about what's possible with AI. I believe it will ignite global innovation in ways that we could never imagine possible, and I can't wait for it to power prosperity in ways that we could never imagine.

Oscar Pulido: So Michael, I want to bring you into the discussion. You were on this tech tour. You're also an active manager. You're managing portfolios and having to make decisions about what to own and what not to own. As someone who invests so broadly across asset classes and sectors, why is it important for you to have a view on technology?

Michael Gates: Well, let's level set a little bit about what's been happening fundamentally for the kinds of companies that are in the public indexes. US Tech over the last 15 years, sales growth rate has been 8% per year compound annual growth rate for the last 15 years, since 2010. If you look at the US market overall, the sales growth rate has been 5%. If you look outside the US, you see growth rates between positive 0.5% and negative 0.5%. Within the US, the IT sector has delivered 50% better earnings growth over the last 15 years at a compound annual rate.

So the ability to beat and raise is something we look for, and where we're finding it is in tech. And within tech where we're finding it is in those companies that are exposed to the AI theme.

Oscar Pulido: Tony, I'd like to come back to you on this topic of AI at the frontier and how much it's evolving. There's a lot of discussion around how AI may supplement human labor in the future, from large language models to all the way to things like humanoids. And so what is your view on this, are we going to see humanoids play a role in our lives anytime soon?

Tony Kim: AI at the frontier, I love this terminology. What we're seeing is this rate of change, an unprecedented rate of change. And humans we're used to linear kinds of change. Growth at 5%, 10%. And what's happening here with AI, we are seeing change at the chip level 2x a year, and we're seeing change at the model intelligence layer 10x a year. So that's like a 20x potential improvement in capabilities, if you take the chip and the model improvements — could be 10x, 20x — but we're seeing this exponential scaling of capability.

So, if we see this kind of non-linear exponential change, and then you compound that one year, two years, three years, four years, you are soon in the thousands of X improvement in just a few years. So, if this rate of change continues between now and let's say 2030, which is just four to five years away, we could see thousands of X capability improvement. So, if we believe that to be the case, and this is AI at the frontier, it is hard to imagine what that means for society. And because the capabilities are improving at this kind of rate, absolutely, yes, you could take the embodiment of this capability and put it into a physical form of a humanoid robot.

Today, I would characterize humanoid robot as the capabilities of a three- or four-year-old child. In two years, it could be a teenager, but in five years we could have very capable, functioning humanoid systems. So, I would say if this is the question on humanoid a little bit, there are the two forms. It's the brain, which is that intelligence capability. And then the physical system of the robot, the mechanical parts. You'll see dramatic improvements on both sides. And so, I think you could get to a point where you could really see that happen before the end of this decade.

Oscar Pulido: And I think the point you mentioned about we're used to linear change and AI really is an example of non-linear change. It's exponential change and it's probably why we spend so much time talking about it as a mega force and a structural driver of returns in the future.

Michael, to come back to you in terms of then the investment opportunity there, there's so much nuance to this space. There's a lot of different winners and losers potentially to come out of the AI revolution. We've seen the dominance of the Magnificent 7 in the US market in particular. But again, how do you think about the role of active management when it comes to this AI theme?

Michael Gates: I keep my eye on the ball in terms of what, is, are the most important indications of financial and economic health. And one of the things we've learned, is that looking at the process of earnings and sales estimate revisions is a really good way to figure out how's it going.

You often get this comment of, oh gosh, the US market's so concentrated, the big companies are such a big part of the index. And that's true, they are a big part. But you might ask the question, is this market concentrated enough? Turn it on its head. And I'll tell you what, if you look at the estimate revisions for the broad index or sectors, what you often find is that there's a subset of companies that are generating really great positive surprises on earnings and sales, and then getting the subsequent positive revisions to their earnings expectations. And that tends to be the largest companies.

Tony Kim: If I were to add to Michael's comments, he is expressing one of my core tenets and observations that I've noticed about the tech sector, what I call a power law. It's not a law, it's an observation. The big get bigger, the winners win, as long as there is tailwind behind these companies. And so, you do see underestimation of the winners just continue to win and win big unless there is some sort of structural change into their competitive position.

And that's what's also fueling these big winners in AI is because there's another element here of AI, which is very unusual, it requires so much capital to play the game.

Oscar Pulido: It's also fair to say, I think we're talking about the concentration of a few companies that have really dominated, but AI as a theme can also then bleed into sectors outside of technology.

And speaking of some of these other industries, Tony, last year when we spoke to you about your tech tour, you you brought up the topic of quantum computing, which maybe was not on the tip of everybody's tongue the way AI seems to be in the last couple of years. And in July, you actually spoke on an investor panel at the Global Quantum Forum in Chicago where they dubbed 2025 as the year of quantum. So you've been an early champion of this technology. What do people need to know about quantum computing, its relationship to AI, and where are we in this journey?

Tony Kim: Yeah, absolutely, great question. Classical computing, which is the Intel, Nvidia, this has been the hallmark of the technology industry for 50 plus years. It just so happens we are now at the dawn of a second computing platform, which was classical computing CPUs and GPUs for 50 years, and that continues. And all of this AI is still based on, as we know, the Nvidia GPU kind of architecture. But these are classical computing architectures for the digital world. I have the opportunity in my career to potentially invest in the second computing platform that will sit adjacent to classical computing, which is quantum computing. Like AI, like fusion, like many other things, these are long, long in development, but we are now at the potential dawn of a utility scale quantum computer.

And what does this do? To just put it simply, it is a completely different computing system that basically computes nature. Nature is based on quantum mechanics at a subatomic level. This is a different kind of computer that can compute the natural world at the subatomic level, which is very different than the digital AI, AGI, classical systems that were driving us to AGI. But this new computing system will sit adjacent to AI systems and it will solve different kinds of problems that we could never solve before with a classical computer. And the output of this new computer is profoundly different and insights to nature, chemistry, biology, drugs, materials, encryption that we've never been able to calculate before, will create new kinds of data.

And then that not only unlocks new discoveries, but it also creates data to help train the AGI system to become even more intelligent. So there is this symbiotic relationship; they don't compete with each other. It just, it's a very different kind of computer. A computer for nature versus the computer of the digital world. And we are at the dawn of this. You mentioned earlier to me about humanoids by 2030, which I think will happen. I think we'll also have quantum computing come onto the scene in a major way also between now and 2030. So again, these next four to five years, it is going to be an epic time of innovation and breakthrough.

Oscar Pulido: It reinforces the point of, this is not linear change, but something unlike what we've seen in the past. We should touch on that, the fact that AI does come with some concerns and we talked about labor and things like humanoids and what that could disrupt in terms of what we know today, but there's also the issue of privacy and security. So I want to go back to our executives that we met throughout the tech tour. We're going to hear from Michael Sentonas, the President of CrowdStrike, which is on the front lines of the effort to provide security, protect privacy as AI grows increasingly sophisticated, and here's what he had to say.

Mike Sentonas: We now live in a world where we are using more and more AI technology in our everyday lives. We're also seeing the attackers get the same sorts of benefits. So we're in this race effectively to build technology, to defend against attacks, to defend and prevent attackers compromising organizations, and attackers that are motivated for financial gain. And we're using this technology to build better systems, better models to prevent these attacks.

Oscar Pulido: So Tony, how are governments and enterprises addressing this and, where's the investment opportunity in this?

Tony Kim: So, cyber is forever here to stay. Before we were addressing human-derived actors using classical techniques to, to try to attack and breach. So now we introduce a super intelligence or a very advanced intelligence. They can write, the AIs can write code, and you will have, let's say millions and billions of AIs that can then create an inexorable rise of attack vectors. And so not only before were we just combating human bad actors, we are now, they can then weaponize themselves using AI-generated cyber vectors. Again, it's a non-linear exponential increase in attack surfaces.

Yet, on the other hand, we could use the AI to help defend against the AI attacking us, and they will be far in excess of what human attackers will be. And so there will be this constant cat and mouse battle of one upmanship of using AI to attack and using AI to defend. This will never go away. In fact, if anything, it becomes even more of an imperative. And so, therefore, the question about governments and companies and I think they're all grappling with this issue — this arms race of weaponizing these AI systems for attack and for defense. And I think that is the direction of travel for the cyber industry.

Oscar Pulido: Michael, this was your first time joining the tech tour. What was your top observation from this marathon week?

Michael Gates: I was really impressed with some of the companies. What was evident to me was was with respect to a couple very important companies in the AI space, they've been anticipating where we are today for years. And they saw that we would be where we are today, which I think many of us find very surprising. They saw this a couple years ago and they are looking to two years ahead. And what they are seeing for two years ahead is really mind blowing.

If you just take it as a fact that they saw what is today a couple years ago and planned accordingly to profit from that development, then you listen to them talk about what is coming in the next couple years and then listen to the indications of what their plans are and the kinds of investments that are happening to make those plans come to being.

Oscar Pulido: And thinking about fast forwarding and what's coming, Tony, if we're having, or I should say, when we have this conversation in September 2026 and we're talking about at that point your 13^th annual tech tour, what will we be talking about then in terms of AI and the developments that we've seen at that point?

Tony Kim: I would say we'll have much more conversations, I believe, around this idea of the super intelligence. Are we closer to physical intelligence as an embodiment in physical systems? That will become more of a topic. And then thirdly, I think you mentioned it, societal impact. What is the societal impact and how the face of work changes, how will it change how we work and these ideas, while they're talking about a little bit, I don't know if the mainstream realizes the potential axiom of change that is potentially coming to that part, the societal impact on how we are doing work, and these questions will be, I think, more at the forefront next year.

Oscar Pulido: I already know that's going to be a fascinating episode to listen to as hopefully this one has been as well, just to hear what's going on in the center of the tech world and what's going on with AI. Just listening to the two of you, it feels like so much has changed in the last couple years, but it's also evident there's so much more change coming and we'll look forward to hearing from both of you what that change looks like.

Tony and Michael, thank you so much for sharing your views on AI and the tech tour and thank you for doing it here on The Bid.

Tony Kim: Thanks, Oscar. It's been great to be here.

Michael Gates: Thanks for having me.

Oscar Pulido: If you enjoyed this episode, check out The Intersection of AI and Geopolitics From An Investing Lens where we discuss how rapid advances in AI are influencing global power dynamics. And don't forget to subscribe to The Bid wherever you get your podcasts.

<<THEME MUSIC>>

Spoken disclosures at end of each episode:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

MKTGSH0925U/M-4769469

The Bid - “How to Invest in AI vs Tech In a Portfolio”

Episode Description:

AI investing is a hot topic of conversation. But how should investors be considering both tech and AI in their portfolios - as part of the same allocation, or should they be separate? Jay Jacobs, US Head of Thematic and Active ETFs at BlackRock joins host Oscar Pulido to discuss whether investors should consider AI and tech as separate allocations, different investing approaches to AI and specific sectors to explore within the AI ecosystem.

Sources: The Economist “IT companies log strong revenue growth outside key North America market, May 1, 2024; “Profiles of the Future: An Inquiry into the Limits of the Possible”, Arthur C. Clarke, 1962

Written Disclosures

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

TRANSCRIPT

<<THEME MUSIC>>

Oscar Pulido: AI investing is a hot topic of conversation. We recently discussed AI and tech investing with Tony Kim and his insights from his annual Silicon Valley tech tour. But how should investors be considering both tech and AI in their portfolios - as part of the same allocation, or should they be separate?

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido

Jay Jacobs, US Head of Thematic and Active ETFs at BlackRock joins me to discuss whether investors should consider AI and tech as separate allocations, different investing approaches to AI and specific sectors to explore within the AI ecosystem.

Jay, thank you so much for joining us on The Bid.

Jay Jacobs: Thank you for having me.

Oscar Pulido: Jay, as we have five mega forces that we've been talking about that the BlackRock Investment Institute highlighted as structural drivers of return over the long term. These include things like, the aging population, the transition to a low carbon economy, and also artificial intelligence. So, when you hear artificial intelligence being dubbed a mega force, do you agree with that?

Jay Jacobs: Absolutely. And there's a few reasons why this is a mega force. I would say one reason to just brute force it is going to have trillions of dollars of impact on the global economy. So, it's big, it's powerful.

But I think secondly, this isn't just a narrow theme. This is something that is going to impact a wide range of sectors and industries as they start to adopt artificial intelligence. I think that's critical to any megaforce is that it should really have broad implications.

And then I think the third reason is that it's going to impact investor portfolios. Whether you intentionally allocate to the AI theme or not, the impact that it's having on the technology sector, the impact it's having on the energy sector, this means that it is going to impact basically all portfolios in the world one way or another. And it really is important for investors to consider that impact as they build their portfolios for the future.

Oscar Pulido: So, Jay, I'm curious to hear, what are you hearing in terms of the sentiment towards this topic from the investors that you meet with?

Jay Jacobs: there's a lot of excitement around AI right now, and I think a lot of this stems from the fact that we've really hit a new catalyst for artificial intelligence. Now, taking a step back, the idea of artificial intelligence has been around for a very long time. The Turing test, which was designed to determine if something was a computer or a human, was created in 1950. We've even had, Siri on our phones for over 10 years, but now we've hit this inflection point with ChatGPT and generative AI platforms that make it more accessible and frankly, more useful than ever before. So, I think a lot of investors are just trying to figure out, what does this mean, what does this mean for my portfolios, what does this mean for my everyday lives and how do I prepare for this?

Now what we've seen, in these first few months of this AI revolution though, is a lot of focus on just a few names, a lot of kind of concentration on household names in the AI space that's common in early days of a technological revolution. But you're starting to see now more interest in thinking about what's next, what's inning number two for artificial intelligence from an investing lens and from what this means for my everyday life.

Oscar Pulido: And we've learned a lot from folks like Jeff Shen about the history of AI and while it feels very recent to us as investors or the topic being talked about in markets, it's been around for a while, but it still feels to me like we're early in the theme in terms of capturing the investment opportunity. I don't know if you'd agree with that. And maybe if you do, how early in the theme are we?

Jay Jacobs: We're still in really early stages of the AI theme. Chat. GPT was released to the world in November 2022. We're a year and change beyond that at this point, really powerful mega forces can take decades to fully, I develop and have the full impact of it felt. So, what are some of the other things to evolve over the next decade or so? I think one is they'll continue to fine tune this technology. Large language models could get more complex and more nuanced than ever before. two, we're seeing the growth of data at an exponential rate and at its very fundamental basis, AI is just about leveraging data to generate more valuable outputs.

And the third thing is that we're getting more computing power than ever before. The semiconductors are getting more powerful. We're seeing hundreds of billions of dollars invested in data centers and really aggregating all of this compute into artificial intelligence. So, if you have better models, more data, more computing power, you really start to see exponential growth in artificial intelligence and an exponential increase in the value of artificial intelligence.

So, you put that all together and the fact that we've been at this for 20 months, 21 months, it's still very early in this mega force.

Oscar Pulido: And from your observation, what are the industries or the companies that have been most impacted by this early stage, mega force, either positively or negatively?

Jay Jacobs: Well, some of the earliest companies are in the technology space, which are actually in the software space because you could think about how, generative AI creates content, some of that content can be actually coding and programming languages for software development. So, some of the companies that have been the earliest adopters of artificial intelligence are just software companies.

Legal and consulting services, so if you can get more efficient in creating documents, more efficient in creating PowerPoints, more efficient in creating strategy documents, those segments of the economy have been affected by this already. But also, if you could look at the healthcare space, we see a ton of opportunity for artificial intelligence, how hospitals are managed to get more efficient, usage of doctors and nurses and medical devices. You look at pharmaceutical development, which is really an exercise in data, in terms of getting all this genetic and personal data and understanding how different drug compounds are going to interact with that to develop revolutionary drugs, there's billions of dollars of opportunity there as well.

So, this isn't an exhaustive list, but if you just take it as technology, healthcare professional services across legal and consulting, you're already talking about hundreds of billions of dollars of opportunity across the economy.

Oscar Pulido: And I know you're not an AI skeptic, but believe it or not, there are some of those people out there and it's natural whenever we have new technology that is unknown and we don't really know the future ramifications, but what do you say to somebody who is a skeptic or when you think about some of the industries that maybe have been negatively impacted so far.

Jay Jacobs: I guess that I would question the nature of the skepticism. I think it's fair for people to say this technology will take time to be adopted, that some of the use cases might be more valuable than other use cases, that maybe, we're being overpromised artificial intelligence in the short term.

But if you really take a long-term structural view of this theme, there's just a lot of conviction that this is going to have a major economic impact. You can see it when you use these tools, how there's really a brilliance, almost a magic to some of these artificial intelligence tools. A quote that I love is that any substantially advanced technologies indistinguishable from magic, that's where we are with generative AI today. Whether you're asking it to write a poem about financial investing or if you're, asking it to develop some strategy document for you, it's really a very powerful tool. And so, I think we learn how to harness this magic and make it an everyday tool, the use cases and the economic impact are going to be massive.

Oscar Pulido: There's a lot of interest, there's a lot of evolution. It seems like when you want to invest in AI, people think about investing in technology and I'll, maybe I'll just invest in the technology sector. are those the same things? If you want to invest in AI and just investing in the tech sector,

Jay Jacobs: A lot of AI companies are in the tech sector, but the tech sector isn't just AI. And one of the terms we use, and apologies, this is like a business consulting, a term here, but MECE mutually exclusive, collectively exhaustive.

This is how the sector world works. Every company has to be tied to one sector and every sector has to be unique in that no company can be tagged to two sectors. So, what that means in the artificial intelligence space is sometimes you have companies that are in the consumer discretionary space, but actually run really powerful cloud computing platforms that are essential to AI, or some companies maybe create software, which is really useful to AI, which is in the tech sector, but other companies might be tagged as a communication services company. So, if you just look at AI from a traditional sector lens, you're not necessarily capturing all the right companies that could exist outside of IT. And you're also going to capture companies within IT that are not AI: printer companies or companies that are, developing glass for smartphones.

Oscar Pulido: So, it's more nuanced is what you're saying. While we like to Break things up into nice, neat categories and definitions, when you talk about something like AI, it sounds like it can cut across numerous sectors.

Jay Jacobs: It does. So, you really have to look from the bottoms up with a fresh lens of identifying what are the AI companies around the world today, regardless of sector, regardless of geography. But really try to understand where these companies fit in the AI value chain.

Oscar Pulido: So, you mentioned the value chain and the AI space can cut across sectors. And so, when you think about the investment opportunities, where should people be looking?

Jay Jacobs: Right now, a lot of people are looking really at the mega cap tech names, specifically in the United States. And some of these companies have the most resources, the most data, the most software engineers, but that's really a very concentrated and limited view of AI. If you look under the hood, I think one of the most compelling opportunities right now is in the infrastructure layer of AI. What we mean by the infrastructure layer is semiconductors, digital infrastructure, even power infrastructure.

Because it's still early days, there could be different platforms that succeed in AI. There could be different products that succeed in AI, but regardless of what platform or product or a large language model of artificial intelligence wins, we know there's a common need, which are those semiconductors, the data centers, and the power.

Right now, AI is going to really drive a lot of power, demand growth. It's going to drive a lot of demand for semiconductors particularly. General processing graphics, processing units, it could even drive a lot of demand for things like copper and other materials that are necessary for data centers and digital infrastructure. So, it's really about not just trying to predict the winners 10 years from now, but who are the companies that form that base layer of infrastructure today and are benefiting from this build out.

Oscar Pulido: And that's consistent with what you talked about earlier. You just said copper. you talked about semis, which is the technology sector. But I'm recalling a conversation that we had with Will Su from the fundamental equities team and his discussion around AI was the demand for energy, that it's going to create. And we talked about data centers as well. So I go back to this question that when you think about AI and investing in AI, it is really different than just investing in the technology sector. Maybe you can elaborate, a bit more on that.

Jay Jacobs: It is. And so, part of that is really thinking across the entire AI value chain. You absolutely have technology companies that are some of the leading voices and developers and products in the AI space today, but if you look below that, that there's companies involved in real estate that are involved in AI.

These are the data centers that own valuable properties that can host, cloud computing services and a lot of compute power in them, and have all the security and, cooling that's necessary to run those. you can look at the energy companies that are going to be supplying power to those data centers.

You can look at companies that own transmission lines that are going to connect the power to those data centers, the semiconductor developers. It's really this entire ecosystem. And so, what I would really suggest that investors do is not get laser focused on just mega cap tech. You really have to look broadly across the economy to understand what is feeding into artificial intelligence.

Not just what is feeding into it, but also what are some of the critical choke points. I think energy could be a choke point. We really have to rapidly scale energy production in the US to be able to feed all these data centers. The physical real estate itself is a choke point. It takes time to build new data centers.

It takes permitting, it takes licenses, it takes materials and labor. Even semiconductors where you see really long supply chains, where there's wait times for some of these really powerful semiconductors, that's a choke point as well. So, it's about considering the entire value chain, it's about looking at who's benefiting in the value chain today, which is really that infrastructure layer. And it's about understanding what are those pivotal choke points where there can be really powerful economic pricing because these companies really have a scarce resource.

Oscar Pulido: As you're describing AI I think of it as a technology, but you're making me think of it more as a theme, that really touches on a lot of parts of the economy and a lot of different sectors.

And so, if you're an investor and you're building a portfolio, it sounds like you have to think about an allocation to AI as distinct from an allocation to tech. And maybe should investors be incorporating both of these in their portfolio or how would you ask, how would you think an investor should think about allocating in this space?

Jay Jacobs: Well, it’s not necessarily either or, but I think because there's overlap between the technology sector and AI, people just have to consider, what is that intersection? we know that investors that are looking just broad benchmarks across US equities or global equities are going to have a lot of tech exposure 'cause these are some of the biggest companies by market cap. But if you really want to have granular exposure to AI and really benefit from this mega force, you have to really make an intentional allocation.

So, one way that we're seeing investors do this is selling down technology exposure and replacing it with an artificial intelligence basket. That's just one way to fund it, we see other people maybe even selling down core exposure and buying an artificial intelligence basket. but you really have to think about how these two areas are intersecting because there is overlap between the two.

Oscar Pulido: And is there a geographical bias when you allocate to AI, do you, inherently allocate more to one part of the world than another? Or is it pretty diverse geographically as well?

Jay Jacobs: Right now, the artificial intelligence theme is very US driven. it could broaden out and you could see more companies around the world enter into the AI space as this theme develops. But if you look right now, the leaders across these different parts of the value chain from some of the chip designers, from some of these LLM platforms, to the data centers, to the energy, a lot of that still is very US focused today.

Oscar Pulido: But presumably the second order effect the beneficiaries of AI are probably more global in nature, and maybe in that case, not just in the US.

Jay Jacobs: Oh, absolutely. technology is a huge export from the United States. If you look specifically at the tech sector, 60% of its revenues come from overseas. So, I would absolutely expect that artificial intelligence will be one of those exports going forward. in a lot of ways this is part of the artificial intelligence theme is this global race for artificial intelligence. And I think if you look at valuations today, a lot of what's baked into some of these artificial intelligence companies is the expectation that this is a global theme, not just a US theme.

Oscar Pulido: And Jay, you spend a lot of time, talking about this theme and thinking about it and helping investors think about how to allocate in their portfolios. But what's that one thing you would want to leave the audience with when they're thinking about artificial intelligence in their portfolios.

Jay Jacobs: I think the one takeaway for investors is to really consider, do they have exposure to the full value chain of artificial intelligence? I'm willing to bet most investors have some exposure just because of how dominant some of the mega cap tech names in the United States are in broad us, US or global benchmarks, but likely investors are missing that longer tail of artificial intelligence names. Again, the semiconductors, the digital infrastructure names, some of the energy names that are going to benefit from this theme. So, it's really, you have to look across the entire value chain rather than just a concentrated handful of mega cap tech stocks.

Oscar Pulido: And you alluded to this, but the BlackRock Investment Institute has also recently talked about the fact that there's a lot of money being invested in this space in AI and all the value chain to use your term, but the return on investment from that might not be immediate. It might take some time before companies benefit from that investment. And I wonder, do you share that viewpoint and how long do you think people have to wait before we really start to see that return on investment?

Jay Jacobs: It depends on what part of the value chain you're looking at. if you look at this massive amount of Capex that's being spent by some hyper-scalers to develop artificial intelligence models, they're spending money today on building data centers, on securing energy, on getting semiconductors.

So, some of those companies are making money right now in artificial intelligence. I think where some of the lag is going to be is in the enterprise or government or in the consumer space, really starting to use these artificial intelligence products, the output from all that Capex, that could take time. It takes time for people to change their habits, it takes time for enterprises to adopt a new technology, to feel comfortable with it, to roll it out to their employees, to encourage its use. There will be a lag, but I think it's a well-deserved lag in the sense that its people taking their time to adopt a new technology and understand how to best use it.

Oscar Pulido: And perhaps, tying it to your comments about the investment opportunities, the companies that are benefiting from it right now are maybe the ones you hear more about. They're getting an immediate benefit, but the ones that have more of a lagged impact of it, it might be the future investment opportunity when it starts to improve their productivity and, when it's accretive to the growth of the overall company.

Jay Jacobs: I think that's right. If we look at today's winners, it's really focused on those artificial intelligence infrastructure companies. It's the semiconductors that are. Very powerful data processors that are powering kind of the training behind these large language models. it's the data centers that are in short supply as we look to rapidly scale computing power across the country.

it's some of the energy companies which are finding really a new growth avenue that they haven't had for the last 15 years in terms of. Growing energy demand from artificial intelligence. Those are today's winners that are collecting revenue really in this near-term timeframe. But if we look longer term, you know that healthcare use case for pharmaceuticals, it might be five years before we realize profitability from that.

Because you have to develop a new drug, you have to develop a new drug, cheaper or better than before. By harnessing this artificial intelligence power that's going to take a little bit of time. So, there's absolutely a, a. A different timescale that some of these companies are operating on in terms of when they will realize the benefit from this theme.

Oscar Pulido: And Jay, how are you finding artificial intelligence? Enter your day-to-day life or has it yet? do you find yourself. Using it or being impacted by it in your personal life or maybe even in your work life.

Jay Jacobs: I'm never going to create an itinerary for a trip again. I, that is something I fully outsource to, to the large language models. even writing emails, it, it takes a little bit of rewiring how you think about using this new tool.

I think we take for granted tools sometimes, we, we know how to use calculators, we know when to use calculators. We know how to interact with them. in a lot of ways AI is just another tool, but we have to get used to it. We have to start thinking about how we use it in our everyday lives to incorporate it, and then we can start to really enjoy the productivity gains of outsourcing some of the less efficient tasks we do, and creating more time for the more complicated, nuanced tasks that we do every day.

Oscar Pulido: In fairness, you might be a little bit ahead of me in terms of the adoption of AI in your everyday life. I still feel like I'm coming up the curve.

But I'm sure we'll hear more about the applications of AI in the world and how to think about it in investor portfolios. in the meantime, Jay, we really appreciate you joining us on the Bid.

Jay Jacobs: Thanks, Oscar.

<<SPOKEN DISCLOSURES>>

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener.

For full disclosures go to Blackrock.com/corporate/compliance/bid-disclosures

MKTGSH0924U/M-3850136