“AI” has been a big narrative driver in public markets in the last year or so. While there hasn’t been too much in the way of value capture, the financial impacts is most clearly seen in the skyrocketing revenue and profit growth of AI chip manufacturer Nvidia. Large tech companies and VC-funded startups have invested billions into GPUs, all in pursuit of AI model supremacy. For many of these tech giants, AI represents not only an enormous opportunity but also a potential existential threat to their core businesses - prompting an all-out race to stay ahead.

Some view AI as just another overhyped trend, similar to 3D printing or the metaverse/VR. Others, however, see it as a transformative shift on par with the Internet, cloud computing, or the smartphone. I personally fall into the latter camp - I believe AI will fundamentally reshape the world at every level, offering vast opportunities for both new and established companies. However, much like the Internet and cloud computing before it, the challenge lies in identifying the winners, losers and ultimately who will be able to capture value from this shift.

So far, some of the larger global companies are making good cases on how they will entrench their positions by leveraging their strong hold on consumer and business data. However, most companies outside this group are talking up very much undifferentiated use cases of AI technology. Every company will be able to use AI to create more efficient marketing campaigns, have chatbots reduce the cost of support enquiries, and access to productivity tools to improve operational efficiency - these applications offer no real competitive advantage.

This trend is evident in the presentation packs of many ASX-listed companies, where buzzwords and superlatives are used to describe what are essentially commodity use cases. Management teams are eager to convince investors that they are at the cutting edge and are thought leaders in this new paradigm shift. However, I’ve yet to identify many true beneficiaries - most seem to be at risk of disruption, with increasing value accruing to the large tech companies.

In recent months, I have noticed a couple of companies in the ASX micro/small cap space where an AI tailwind narrative is starting to become a bit more coherent - Ai-Media (AIM) and Credit Clear (CCR). For the two companies, I’m seeing the following properties which I believe to be beneficial tailwinds:

1. Leveraging, not building AI technologies

It’s a red flag when a small company claims that they’re putting a lot of research and development into AI. Large mega-cap tech companies are pouring billions into frontier LLM and machine learning models that are readily accessible and improving rapidly. It's unrealistic to think a small company can beat them at their own game. Any cutting-edge work or even tweaks to existing AI models by small companies might quickly become outdated as the tech giants release new versions. Companies like OpenAI, Anthropic, Google, Meta, AWS, and Microsoft are constantly pushing the boundaries, making it hard for smaller players to keep up.

This is where we need to see some humility from management teams. Most companies should be tweaking around the edge on existing models and doing their best to ride a fast moving beast.

Ai-Media is doing a great job with this approach. They don't claim to be creating new AI models. Instead, they're using the best tools already made by big tech companies. Right now, AIM uses speech-to-text services from Microsoft, Google, and AWS for their live captioning. These services keep getting better, which means fewer mistakes in AIM's AI captions.

AIM has a busy year ahead with many new products coming out. Products that will be leveraging readily available text-to-audio (Live Voice Dubbing), LLMs (Topic Models), translation (Translation 2.0) and other models and services that will create real value for Ai-Media’s end customers. These are readily available and fast improving technologies that Ai-Media can ride on the backs of.

Ai-Media technology roadmap from the FY24 presentation pack

2. The popularisation of AI is helping them sell

Credit Clear and Ai-Media have been talking about AI's benefits for their customers for years, long before ChatGPT came out.

But when ChatGPT 3.5 was released to the public in November 2022, and quickly improved, it showed everyone what AI can really do. Now, instead of having to convince customers about AI's benefits, customers are actively looking for AI tools to make their work better. What was once a challenge has become an advantage. Both CCR and AIM's management have said it's much easier now because all their customers understand AI's value.

3. Some defensibility against new competitors

While easy-to-use AI tools create opportunities, they also make it easier for new competitors to enter the market. We’re back to a time when kids in a garage can leverage these technologies and come up with incredible user experiences that have not been previously seen. So, it's crucial for companies to have some way to defend against these new players.

AIM’s defence comes in the form of their hardware and software caption encoding solutions which ingests the video and audio feeds from the source and attaches captions over the top. It’s relied on by the largest US live broadcasting (NBC, NBA, NFL, etc) and big tech (Google, AWS, Netflix, etc) companies. It's a key part of what AIM offers and would be hard for new competitors to compete with. This is not just because of the technical know-how needed, but also because of the trust AIM has built over decades with major clients in high-pressure situations.

CCR is a debt collection company that uses digital tools to make collections more efficient. They started as just a software company but struggled to grow. So, they changed to offer full services, including legal collections. Any new competitors would likely need to do the same, but CCR has a big head start in this regulated and relationship driven industry.

4. Riding the tailwind

Both companies are benefiting from big trends in their industries. For AIM, rapidly improving AI services are allowing them to create new products. These products are changing language services that previously required human involvement. At the same time, captions are becoming more popular and expected everywhere. This growing demand is pushing AIM's business forward.

For CCR, the big trend is the shift of technology and automation replacing or improving human roles in debt collection call centres. CCR is well-positioned to take advantage of this ongoing change, using their digital tools to make debt collection more efficient.

I’m sure there are other listed companies exhibiting similar characteristics and benefiting from similar tailwinds. I’d be interested to hear some examples of other companies that are leveraging existing AI technologies effectively, finding it easier to sell their solutions, and have some form of defensive position not available to competitors - and not just commodity, undifferentiated or over-hyped use cases.