Artificial Intelligence (AI) is a game-changer, and it's making waves across various industries. From healthcare to finance, AI is revolutionizing the way we do things. One prime example is ChatGPT, which showcases the growing demand for AI technologies. With such a vast market, investing in AI has become a hot topic for investors looking to capitalize on this disruptive technology.
AI Ecosystem and Investment Options
This ecosystem consists of three groups: companies that sell AI as a product or a service, companies that build AI models and develop the wider infrastructure, and companies that are building the hardware necessary for it all to work.
Companies Selling AI Products and Services
If you're looking to invest in AI, you might be interested in companies that are directly involved in AI. These are often referred to as "pure-play" stocks. Examples include:
C3 AI: Provides a platform and applications for businesses to quickly build and deploy AI solutions.
Soundhound: Specializes in voice-enabled technologies and music discovery apps.
BigBear.ai: Helps customers collect and understand data for better decision-making.
iFLYTEK: A Chinese tech company creating voice recognition software and intelligent speech products.
These companies offer direct exposure to AI and have various growth opportunities. However, they also face intense competition and rapid technological changes.
Big Tech: The Model Builders and Providers
What Role Does Big Tech Play in AI?
Big Tech companies like Microsoft, Alphabet, Meta, Apple, Amazon, Palantir, and Tesla are at the forefront of AI development. They have the resources, data, and expertise to not only build AI models but also to create the infrastructure around them. Microsoft, for instance, has an exclusive partnership with OpenAI and is integrating ChatGPT into its search engine Bing and productivity apps. This not only brings in new revenue but also enhances Microsoft's expertise in AI.
Alphabet has integrated AI into almost every aspect of its business, from ad pricing to Gmail spam filters. It owns AI software subsidiary DeepMind and is conducting research in various fields like robotics and quantum computing. Meta, formerly Facebook, has invested heavily in AI labs and is focusing on augmented reality and virtual reality as part of its vision for the metaverse. Meta has also released a new AI model designed to help researchers make new discoveries and plans to create more personalized content from scratch.
Apple has acquired several AI companies and integrated the technology into its devices, enabling small independent app makers to build new businesses. Amazon use AI in its personalized product recommendations, e-commerce search algorithms, virtual assistant Alexa, its warehouse robotic arm Sparrow, and its cloud computing service AWS. Palantir specializes in AI-powered data analytics, helping customers analyze huge amounts of data, make better decisions, and solve complex problems. Tesla is working on a humanoid robot, self-driving cars, and possibly an Airbnb- and Uber-like robot taxi service.
China also has strong players in the AI space. Tencent is expected to benefit from AI by improving gaming algorithms, enhancing medical diagnosis, promoting industry cooperation, and creating AI breakthroughs for enterprises. Alibaba and Baidu are both well-positioned in the space, with Baidu expected to launch a ChatGPT-like product soon.
Pros and Cons of Investing in Big Tech for AI
Deep pockets, top talent, and huge datasets put tech giants in a prime position to develop advanced AI technologies that could be used in various ways by different companies.
By providing the base-layer infrastructure, they enable other companies to build specialized applications, thereby increasing their market share.
If AI proliferates across all industries, Big Tech is likely to benefit massively. They will provide the platform and facilitate the disruption.
It may take some time for AI to become a significant part of Big Tech's revenue.
The cost of developing AI infrastructure is falling, increasing competition.
The AI landscape can change very quickly, adding an element of risk
Hardware (i.e. Picks and Shovels)
The Gold Rush Analogy
In the realm of AI, hardware companies serve as the "picks and shovels" of the industry, reminiscent of the gold rush era. These are the firms that provide the essential hardware needed to train and run AI models.
Nvidia stands out as a likely major beneficiary in the AI hardware sector. Specializing in graphics processing units (GPUs), Nvidia's chips are crucial for training and running deep-learning models. Beyond hardware, the company has also built a robust AI ecosystem that continues to evolve. Advanced Micro Devices and Intel are also in the game but are less exposed to AI.
TSMC, based in Taiwan, is another significant player. It is the primary manufacturer of high-end chips worldwide, including those used by Nvidia, Advanced Micro Devices, and Intel.
Pros and Cons
Investing in hardware companies offers a safer bet than focusing on end-use cases, especially given the nascent stage of AI technology.
These companies already have established businesses, making their stocks less speculative.
AI is not yet the primary revenue driver for these firms.
These companies are subject to economic cycles and could be impacted by a potential recession.
They might have less upside compared to pure plays or Big Tech stocks, despite facing similar competitive pressures.
ETFs: A Diversified Approach to AI Investing
When it comes to investing in AI, Exchange-Traded Funds (ETFs) offer a diversified approach, especially since there are limited options for "direct-play" companies solely focused on AI. Here are some ETF options you might consider:
iShares Robotics and Artificial Intelligence ETF (IRBO)
This ETF has an expense ratio of 0.47% and holds shares in over 100 companies, including smaller international firms. It provides a broad exposure to the AI and robotics sectors.
Global X Robotics & Artificial Intelligence ETF (BOTZ)
With an expense ratio of 0.68%, this ETF holds 37 stocks. Its top five holdings—Upstart Holdings, Nvidia, Intuitive Surgical, Keyence, and ABB—account for about 40% of the fund's assets.
VanEck's Upcoming ETF (CHAT)
VanEck plans to launch a new ETF called Conversational AI, AI and Innovation ETF (CHAT). This will be an actively managed fund targeting "conversational" AI technologies similar to ChatGPT.
For a more actively managed approach, you might consider the ARK Next Generation Internet ETF (ARKW; 0.88%) or the ARK Autonomous Technology and Robotics ETF (ARKQ; 0.75%). The broader ARK Innovation ETF (ARKK; 0.75%) might be a better diversified option.
For European Investors
The WisdomTree Artificial Intelligence UCITS ETF USD Acc (WTAI; 0.4%) could be a suitable option, as it tracks companies perceived to have significant exposure to AI.
Pros and Cons
Pros: ETFs offer diversified exposure to a broad theme, making them a good option when you're unsure which specific stocks or sectors will benefit the most. Given the limited alternatives, these funds might attract significant capital inflows.
Cons: The biggest downside is that most of these ETFs only have AI in their names and are loosely related to AI. They also don't weight stocks based on valuations, future prospects, or AI exposure, which could be a drawback.
So, What Are the Biggest Challenges If You Want to Invest in AI?
The Narrative Trap
Investing in AI is not just about the technology's potential; it's also about the narratives that surround it. While AI has a compelling story, narratives can often mislead investors. They can inflate prices and create a disconnect between a company's actual value and its stock price. The more a narrative is accepted, the higher the risk of disappointing returns.
Predicting Winners and Losers
Identifying the companies that will benefit the most from AI is a complex task. The early leaders in a technological revolution are not always the ultimate winners. For example, Netscape and AOL led in the early days of the internet but were not the biggest beneficiaries. Companies like Amazon and Apple, which leveraged the internet in innovative ways, were the real winners. Similarly, the biggest winners in AI might still be off the radar and could come from entirely different sectors like healthcare or biology.
Technological Revolutions Are Messy
New technologies don't just depend on their technical capabilities; they are also influenced by social, economic, and political factors that are difficult to predict. According to economist Carlota Perez, technological revolutions typically go through four phases, including a "reset" period that may involve a financial crash and societal shifts. If this theory holds, we might first experience a volatile period before enjoying any golden age of AI.
So, What's the Opportunity Then?
AI is a hot topic, but it's not a guaranteed win if you invest in it right now. The smart move is to spread your bets. Look at companies that are building AI models and those providing the tech backbone for AI. Big Tech companies, which are already dipping their toes in AI, are also good options.
Companies that make hardware for AI could be a good addition to your investment mix. But be cautious with stocks that are all about AI and also thematic ETFs. They might be getting more attention than they deserve and may not cash in on the most profitable AI uses.
Key Points to Remember:
Spread your AI investments across different types of companies.
Don't let FOMO make you rush into investments. The best thing you can do now is learn more about AI.
Investing for the long term in solid companies at fair prices has usually paid off. So, there's no need to hurry into AI investments.