AI Stocks Alert: Identifying the Winners in the AI Revolution
The emergence of artificial intelligence (AI) is set to be the biggest theme of 2023. Despite the existence of AI in various forms for years, it is the development of ChatGPT that has truly sparked imaginations. From an investment perspective, Nvidia has been a major beneficiary, with its stock price nearly tripling in the first half of the year. However, it is unlikely to be the sole winner in the AI revolution.
The global AI market is expected to grow at an annual rate of 35%-40% over the next decade. This presents several opportunities for investors to capitalize on this growing industry. But how should one approach investing in this space? Should you go with the big industry names that have significant financial resources for development, or opt for smaller emerging companies with existing solutions? Alternatively, should you consider investing in picks and shovels companies? Which segment of the market is likely to fare the best?
AI can be categorized into three main segments: software, hardware, and services. Currently, software captures the largest share of the market, as we are still in the early stages of this trend. Companies like Google and IBM are actively building their range of AI products and are expected to have involvement in various sectors such as advertising, media, and healthcare.
On the hardware side, major chip companies are driving advancements. These companies are focused on developing the necessary infrastructure to handle data storage requirements and the computing power needed to enhance AI capabilities over time.
The current AI market resembles many emerging industries. There are a few dominating heavyweights along with numerous smaller, fast-growing companies trying to establish themselves. While investing in smaller companies may offer greater potential, it also comes with a higher risk of failure. This is why investing in a broad basket exchange-traded fund (ETF) might be a sensible choice, as it allows for a bet on the industry as a whole rather than relying on potential winners. However, it is worth noting that there are currently limited pure-play AI options within the fund industry.
AI is expected to follow a similar path as previous technologies. The financial powerhouses like Microsoft, Nvidia, and Google are likely to acquire potential competitors through mergers and acquisitions (M&A) to solidify their position. Acquiring existing technology is often easier than developing it from scratch, and we can anticipate this trend in the AI space as well.
In the long run, the stocks most likely to emerge as winners in AI are the mega-cap companies mentioned earlier. They have the resources to invest heavily in AI and can potentially eliminate any competing challengers. While AI currently contributes only a small portion to their overall business, its influence is expected to grow significantly in the years to come.
In conclusion, identifying the winners in the AI revolution requires careful consideration. Investing in the leading mega-cap companies provides ancillary exposure to AI, but it is also important to monitor the growth of smaller, emerging companies. Overall, the AI industry presents an exciting investment opportunity as it continues to reshape various sectors of the economy.
