Investing in AI via software firms with a large user base

Looking beyond the infrastructure companies that have been early beneficiaries of the emergence of artificial intelligence, Fidelity's Kyle Weaver sees opportunity in firms providing applications with many existing customers.

• Artificial intelligence may represent the next major wave of computing, and while Fidelity Portfolio Manager Kyle Weaver believes there are attractive investments among many types of companies that could benefit from its emergence, he is particularly focused on firms with a large installed base of users.
• "When a company with a large user base incorporates AI into its software or hardware, there is potentially an immediate market for it," says Weaver, who co-manages Fidelity Advisor^® Growth Opportunities Fund, along with Becky Baker. "This market could be either through a new product cycle or by selling its AI product as an add-on."
• In helming the diversified domestic equity strategy, Weaver and Baker focus on companies with a distinct growth profile, anchored by a philosophy that the market can often miss nuances of a company's business that can have profound implications for the long-term value of the enterprise.
• The fund has meaningful investments in a range of companies the managers view as key providers of AI infrastructure, as well as those with potentially profitable AI applications.
• "Microsoft is a good example of this latter scenario," Weaver points out. As of January, the company's installed user base for its Microsoft 365 productivity suite totaled roughly 400 million worldwide. In September 2023, Microsoft began selling an add-on AI tool for the suite called Microsoft 365 Copilot.
• "We believe Copilot offers another growth engine for Microsoft," Weaver contends, noting that it was the fund's second-largest position as of November 30.
• Analysts estimate that Copilot could generate $10 billion in annualized revenue by 2026, and one big reason for that optimism, in Kyle's view, is that so many people are already using applications, such as Word, PowerPoint and Outlook, into which Copilot can be seamlessly integrated.
• Meta Platforms, the No. 3 holding at the end of November, is another example of a company Weaver favors for its large user base—about two billion across Facebook, Instagram, Threads and WhatsApp.
• Meta has spent aggressively to position itself for future AI opportunities to help users research topics, explore interests, get how-to advice and engage in social shopping, according to Weaver.
• There's also Apple—another sizable position—which boasts roughly two billion users of its smartphones, computers, tablets and other devices.
• Kyle thinks there is a fairly straightforward path for Apple to incorporate AI into its products and is encouraged now that the company has recently provided further guidance on this topic.
• "We believe these application providers are well-positioned amid the growth of AI capabilities by capitalizing on their existing base of customers," concludes Weaver. "We continue to monitor their progress closely."