The AI market opportunity: UBS offers a bottom-up perspective

The launch of ChatGPT in November 2022 marked a pivotal moment in artificial intelligence (AI), propelling it into mainstream adoption. According to UBS analysts, this event has spurred significant investment and technological advancement, with potential impacts across all economic sectors.

In a recent note to clients, the bank’s strategists stressed that while AI adoption is in its early stages, its investment potential is substantial.

“In the early innings of the AI era, we recommend investors focus on vertically integrated players across the AI value chain,” they wrote, highlighting businesses that combine clear monetization paths with strong competitive positioning.

The potential size of the AI market is immense, with estimates ranging from Bloomberg’s $1.3 trillion by 2032 to McKinsey’s $4.4 trillion. UBS suggests annual AI-related revenues could exceed $1 trillion over the next decade.

This growth is expected to be driven by productivity improvements from AI tools for knowledge workers, who number around 1 billion globally. For example, developers using AI tools like GitHub Copilot can code up to 55% faster, and customer service operations could become 30-50% more efficient with generative AI.

UBS outlines an investment framework with three layers of the AI value chain: enabling, intelligence, and application layers.

The enabling layer includes physical infrastructure, such as AI data centers, necessary for training and running generative AI models. UBS projects annual capital expenditures for this layer to reach $331 billion by 2027, driven by investments in AI servers and data center infrastructure.

“Most of the value in the enabling layer is likely captured by AI servers,” UBS notes.

“Because of the scale of AI compute, most companies will likely consume compute resources in the form of cloud services. As a result, we expect generate $185 billion in value creation to be generated by 2027.”

The intelligence layer comprises generative AI algorithms and large language models (LLMs) that use the computing resources from the enabling layer. Although still in the early stages of monetization, this layer is expected to show strong growth due to its foundational role in AI development.

“We expect this layer to show the strongest growth into 2027 given its small base,” UBS highlighted.

Lastly, the application layer, which includes AI-powered software applications and services, offers the greatest monetization potential, UBS strategists said. However, the opportunity within it is difficult to quantify at this stage, they added.

This layer features tools like AI co-pilots for coding and personal assistants, which have already demonstrated significant productivity gains. Microsoft’s GitHub Copilot, for example, generated over $100 million in revenue in 2023 and grew 40% year-over-year with 1.3 million users.

“With developer productivity gains of 50–60%, we expect an acceleration in the creation of software code,” strategists wrote.

For the near term, UBS said it sees the largest opportunities in the enabling layer of AI. The bank still expects that the ratio of applications to the enabling and intelligence layers will imply limited bottom-line profitability for the application layer during the initial stages of the cyclical and structural ramp of generative AI.