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It’s the reason behind Nvidia’s meteoric rise. Apple is integrating it into its software. Big Tech companies are pouring billions of dollars into building data centers to train it.

AI is the talk of Wall Street right now, and according to UBS, it isn’t going anywhere. The bank estimates that by 2027, the market for AI could surpass $1 trillion. For those wondering how to capitalize on this seismically disruptive technology, UBS outlines the following investing strategies below.

The AI Value Chain

According to UBS, investors should approach the overall AI industry as three interconnected layers: enabling, intelligence, and application.

The enabling layer consists of the underlying technology behind AI products. Think semiconductors, chip design, data centers, and power supply. Although not directly involved with end products such as chatbots, these are the picks and shovels that make AI possible. The intelligence layer utilizes the inputs of the enabling layer to develop large language models. And lastly, the application layer delivers the AI to the end user through applications such as virtual assistants, digital advertising, and call centers.

Where and How to Invest in the AI Value Chain

How should investors approach this potential trillion-dollar market? By understanding the major players in the AI space and investing in the most critical parts of the AI value chain, according to UBS. Here’s the bank’s four-step strategy.

  1. Make sure your allocations are big enough

Investors should first obtain adequate exposure to the AI industry at large. This sounds deceptively simple, but with the industry growing at breakneck speed, investors will see the most upside by making sure that they are assigning enough weight to AI investments within their portfolios.

‘Given the size of some of the largest AI companies, investors may consider weightings more akin to those of certain country equity markets than to those of other companies,’ said a team including Ulrike Hoffmann-Burchardi, UBS’s head CIO of global equities, in a June 10 note.

  1. Focus on the enabling layer

UBS sees the most value in the companies within the enabling layer. This sentiment is also widely reflected across Wall Street: hardware stocks such as Nvidia (NVDA), Dell (DELL), and Broadcom (AVGO) have seen their stock prices skyrocket this year in large part due to the AI boom. Companies within the enabling layer offer a combination of strong growth potential, competitive positioning, and fair valuations, UBS said.

  1. Big Tech mega-caps are key

Size matters when it comes to AI. The industry wouldn’t be where it is without the backing of Big Tech companies deploying billions of dollars into AI investments annually. These companies have seen outsize benefits from AI, and UBS expects mega caps to continue to reign supreme. The bank predicts that the AI landscape will be marked by ‘vertically integrated’ and ‘monolithic’ firms with the scale to reach across the AI value chain. Investors stand to benefit from exposure to these Big Tech firms.

  1. Look outside the US for opportunities as well

While the biggest names in AI are predominantly US-based, UBS emphasized the importance of looking for international opportunities, especially in China. For example, Chinese e-commerce giant Alibaba invested over $1 billion in four different AI startups last year. However, its stock hasn’t seen the price appreciation that domestic tech companies have, suggesting that there’s ample room for valuations to expand.

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