Harvey Jones
11.07.2023

Are you smart enough to make money out of artificial intelligence?
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Investors who have been waiting for the next big thing appear to have found it in the artificial intelligence (AI) revolution.
AI seems destined to change the world – possibly by destroying mankind, according to some – and investors are already reaping the rewards.
Tech-focused US companies with exposure to generative AI and machine learning technology have skyrocketed this year, with chip maker Nvidia soaring more than 180% by the start of June.
It was briefly a member of the $1trillion club alongside tech giants Apple, Microsoft, Google-owner Alphabet and Amazon, before its share price dipped as investors decided the hype had gone too far.
The buzz around AI has been a much-needed tonic for the US stock market after a difficult 2022.
The S&P 500 officially entering bull market territory since the lows of last October, rising 20% to 4,293.93 on 8 June.
Yet as we saw during the dot.com boom, breakthrough moments like these are notoriously risky for investors, as the small number of winners are dwarfed by the many, many losers. They’re also hard to identify in advance.
Investors need to show some intelligence of their own and approach today’s AI excitement with a level head.

Is AI just too clever?

AI is a radical step forward, as anybody who has played around with OpenAI’s natural language processing chatbot ChatGPT will testify.
Accountancy group PWC predicts its global economic impact will total $15.7 trillion by 2030, just seven years away.
AI looks set to looks set to change the way we live, work and play, and investment professionals are excited.
Harry Raikes, manager of the Schroders Capital Global Innovation Trust, says it has the potential for innovation and disruption to match email, the internet and the smartphone. “It’s not just the magnitude of this innovation that’s remarkable, but the speed at which it’s being adopted.”
Yet he cautions that we don’t yet know whether AI will make society smarter and more efficient, or bury it in “rampant misinformation”.
Alastair Unwin, a fund manager at Polar Capital Technology, says AI is set to be the next major secular technology trend “taking on the baton from the cloud and mobile internet”.
Yet as anybody who tried investing in other recent tech fads such as crypto, space exploration and Mark Zuckerberg’s unloved Metaverse learned to their cost, this doesn’t guarantee riches.

Choose your risk level

Brave investors will make a beeline for pure play AI stocks. There’s a lot of excitement around C3.ai, which provides companies with "prebuilt, configurable, high-value AI applications” to help with everything from fraud detection to energy management, and customer engagement.
C3.ai’s shares have even outpaced Nvidia this year, yet its market cap is relatively tiny at just $4billion.
Shares in US robotics warehouse automation Symbotic, which uses AI in its automated warehouse systems, have also soared, boosted by the fact that it helps retail giant Walmart manage its supply chains.
Cybersecurity firm CrowdStrike Holdings, whose security platform Falcon uses AI and machine learning to respond to constantly evolving online threats, is also flying.
Upstart Holdings, SoundHound Ai, Berkshire Grey and Cerence are all in demand but the potential outsize rewards are matched by the outsize risks.
Just as any company could quadruple its market cap by adding the suffix .com to its name during the 1990s tech boom, any company that boasts about using intuitive AI algorithm can generate an instant buzz today.
Most investors should rely on their accumulated store of knowledge and resist the hype.

Big is beautiful

A safer way to invest in AI is via the shares of mega-cap US tech giants who may enjoy the bulk of the benefits without taking anywhere near as many risks.
Nvidia is the obvious stock here, as it “is likely to be one the foundational companies in the AI ecosystem”, according to Claire Shaw, portfolio director of investment trust Scottish Mortgage.
Ms Shaw says generative AI systems need knowledge to create content, which requires graphic processing units (GPUs) or tensor processing units (TPUs) with specialised ‘accelerator’ chips capable of processing data across billions of parameters in parallel.
Nvidia dominates the market with around 90% of generative AI programmes trained using its chips.
Ms Shaw also picks out ASML Holdings, the dominant manufacturer of the lithography equipment used in chips.
Both companies enjoy dominant position makes it hard for smaller rivals to keep up, Ms Shaw adds.
Microsoft’s is a big AI player with its investment in OpenAI and ChatGPT, the fastest-growing app of all time.
Google has released its own AI chatbot Bard, while Amazon is using AI to predict consumer demand, manage inventories and speed up deliveries. IBM has its own AI solution for business customers.
If tempted, bide your time and wait for today's AI mania to ease. Tech is a volatile sector and liable to sell off after its strong run.

Tech is still tops

Investors who would like to spread their risk could choose an AI exchange traded fund (ETF) such as the Global X Robotics & Artificial Intelligence ETF. Unsurprisingly, Nvidia is the ETF’s top holding at just over 10% of the portfolio, alongside lesser known holdings such as Intuitive Surgical and Keyence.
The Global X Artificial Intelligence & Technology ETF puts the focus on established tech names with Nvidia, Meta, Tesla, Microsoft, Apple, Amazon, Alphabet, Oracle and Adobe all top 10 holdings.
Other ETF choices include the iShares Robotics and Artificial Intelligence Multisector ETF, which targets developed and emerging companies at the forefront of the AI and robotics value chain, and features Nvidia, naturally, Microvision, Meta and Spotify.
As with any investment, never buy with less than a five-year view, and ideally much longer than that.
Even if the AI frenzy abates, many big tech companies could still prove winning long-term investments.
As this year has shown, the tech giants are still driving markets, responsible for almost all this year’s S&P growth.
The sector is impossible to ignore, but as with any big investment opportunity, investors need to keep their wits about them.

Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.

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