Arguably the world changed forever in November 2022 after OpenAI said it had created an interactive, conversational AI (artificial intelligence) which drives its ChatGPT app.

According to a Bloomberg report the US first quarter earnings season witnessed a 77% increase in company references to AI and related terms, showing company managements couldn’t stop talking about it.

Share prices of companies thought to be major beneficiaries have rocketed such as chip maker Nvidia (NVDA:NASDAQ) whose shares are up 240% over the last year.

On the other side of the coin industries at risk of losing jobs due to automation have come under increased pressure. The US AUW (Auto Union Workers) strike is arguably just as much about protecting job losses from AI as it is about increasing pay.

New research from investment bank Morgan Stanley throws some light on what markets might be pricing as AI unfolds.

Looking at future implied valuation metrics such EV (enterprise value) to sales ratios analysts can identify how different sectors are expected to be impacted. EV is market cap plus net debt.

Interestingly, the bank notes that the derating (a fall in valuation metrics such as price to earnings ratio) in ‘AI challenged’ sectors has been far more brutal relative to past technology disruptions.

This may throw up opportunities where forecasts overly discount the risks while being complacent about potential rewards. The bank’s analysts argue that the music and education sectors now look relatively favourable from a risk-to-reward standpoint.

A potential concern for music artists and the labels representing them such as Universal Music (UMG:AEX) is that copyright laws have not been tested for AI infringements. While analysts may be cautious it doesn’t appear to be a big concern for investors judging by the share price of Universal which is on the cusp of new 12-month highs after an initial fall.

Universal is the world’s largest holder of music rights and Morgan Stanley sees more opportunities than risks from AI as protections are embedded into artists’ agreements. The bank argues that progress on ‘artist-centric’ agreements would improve the amount artists receive in royalties and thereby provide a boost to a label like Universal with lots of major names in its stable.

Education group Pearson (PSON) could be seen to be at risk as more students turn to AI for course content thus reducing reliance on its course materials.

But Morgan Stanley points out the opportunities could be greater than the risks. Pearson is launching AI features which may prove more reliable than models which rely on open source, argues the bank.

Another benefit could come from an increase in examined work due to the risk of course work becoming easily plagiarised. This could result in higher demand for Pearson’s Assessment and Qualification business. 

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