Investors considering investing in artificial intelligence should first apply some common sense. The gold rush started by chatbot ChatGPT is swiftly developing into a mini-bubble—and there’s no need to look far back in history to realize how quickly bets on trendy new subjects may freeze your portfolio.
This week, chipmaker Nvidia NVDA -0.83% decrease; red down pointing triangle was temporarily valued at more over $1 trillion, because to investor enthusiasm for demand for chips developed by so-called “generative AI,” the technology powering ChatGPT. Smaller AI-related firms have also risen as investors look for the big winner in the newest trendy theme.
The shift is simple to grasp. ChatGPT was released to an unknowing public in November and quickly grew to 100 million users, making it the fastest-growing consumer program ever. Aside from producing poor jokes, bad poetry, and clumsy LinkedIn-style articles, it is utilized and abused by students, lawyers, CEOs, and programmers.
Naturally, investors want to identify the companies that will benefit from what is being touted as the most significant technical advancement since the internet. There are two issues. The first is that artificial intelligence may once again be overhyped. The second factor is a scarcity of locations to invest, which has resulted in some remarkable stock jumps.
AI has certainly been overhyped in the past. I studied neural networks and expert systems as a student amid a wave of AI hype in the early 1990s, before one of the numerous AI winters rendered the effort futile. The excitement peaked in 2010, when IBM’s Watson system was believed to be capable of defeating humans on the game show “Jeopardy!” IBM’s stock rose after Watson won the competition and was commercialized in 2011, but it has since dropped by more than a third since its peak.
The hype cycle may have finally reached a stage where AI will be visible to consumers rather than offering behind-the-scenes advancements like Alphabet’s Google Translate or camera face focus. It has undoubtedly captured the public interest in a way that past AI discoveries have not, as well as the attention of regulators.
Unfortunately for would-be AI investors, there are few public AI startups. Who will benefit from AI advancements? Nvidia is the obvious contender, as its chips are the picks and shovels of the AI gold rush. However, Nvidia stock is risen 160% this year, and it trades at 44 times 12-month forward profit forecasts—even after analysts increased their estimates.
AI investors have flocked to the rest of Big Tech in search of their pick-and-shovel equivalents in the shape of cloud services, or because they, too, are substantially invested in AI. As a result, the top tech stocks have separated themselves from the rest of the market.
The difficulty in finding areas to invest is reflected in the AI exchange-traded funds. The greatest is BOTZ, the Global X Robotics and AI ETF, which had the 19th-highest inflows of any FactSet-tracked ETF in the previous month despite not even ranking in the top 100 by size.
C3.ai is a classic for theme-oriented investors. It is in its fourth incarnation, having explored business strategies in carbon emissions, energy management, and the “internet of things” (each with a different corporate name) before settling on AI. Investors looking for growth would enjoy it, since revenues have nearly tripled in four years (albeit its shares fell on Wednesday after slightly disappointing estimates). Investors who are interested in the company should look at what it is spending to get those sales: It lost 36 cents on every dollar of sales in the year to April 2019, before its IPO, but lost just over $1 on every dollar of sales in the previous year.
Once again, the AI hype is likely to be just that. It will persist as long as the hype lasts, just as the far larger dot-com bubble, or the more recent mini-bubbles in 3-D printing, clean technology, cryptocurrencies, cannabis stocks, and SPACs. Someone, somewhere, will undoubtedly profit handsomely from AI, and many businesses may benefit from increased productivity. But, without a doubt, not all of the currently-tipped stocks will be winners, if any at all.
Finally, if you’re thinking about investing in a fund that employs artificial intelligence to select stocks for you, don’t get your hopes up. AIEQ, the AI Powered Equity ETF, is the oldest of these, having used IBM’s Watson since 2017. It has returned 34% including dividends from inception, compared to 82% for the S&P 500. Oh, and Nvidia is underweight.
