In an overvalued market, seasoned tech investors are looking for inexpensive chances.
The question is how to invest in the promise of artificial intelligence (AI), which advanced in November with the introduction of the ChatGPT bot by Microsoft-backed OpenAI, without entering a bubble.
Since the introduction of ChatGPT, the stock price of Nvidia, a manufacturer of computer processors used in AI training, has practically doubled. At almost $940 billion, the company’s stock market worth is more than twice as much as Nestle Europe. Nvidia increased by over 25% on Thursday alone after predicting a rise in sales.
The stock ticker for the loss-making AI software business C3.AI has increased in value by 149% this year, and Palantir Technologies, which recently unveiled its own AI platform, has seen a year-to-date gain of 91%.
Investors are vying for exposure to generative AI, a technology developed by ChatGPT that creates text, graphics, and computer code by learning from the analysis of enormous datasets. Businesses are attempting to employ generative AI to accelerate legal work, recruitment, and even video editing.
According to consulting firm PwC, productivity improvements and investments related to AI are expected to generate $15.7 trillion in global economic output by 2030, which is nearly equal to China’s GDP.
Investors must decide whether to board the AI train right away or proceed cautiously, especially in light of the authorities’ growing anxiety over the technology’s potentially disruptive effects.
“There are clearly going to be winners in all this,” said Niall O’Sullivan, chief investment officer of multi-asset for EMEA, at Neuberger Berman. “It’s just that that’s very hard to be true for the entire market.”
Experienced investors are using a lateral approach to support previously successful technological companies that might profit from the longer-term trend rather than jumping into highly valued AI-themed enterprises that might fail or investing in hot start-ups.
“It’s going to be as transformative as the internet, as the mobile internet, as the mainframe computer was,” said Alison Porter, a tech fund manager at Janus Henderson, whose funds have positions in Nvidia, with Microsoft as their largest holding.
Porter does, however, add a word of caution: “We are still very early on the use cases for AI.”
She supports major tech companies like Microsoft and Alphabet because of their “strong balance sheets,” which enable them to “invest in many different technology advances,” including their current emphasis on AI.
Some investors are hesitant to invest in the technological hype cycle due of dizzying values. This idea, made popular by the consulting firm Gartner, begins with a trigger, such the introduction of ChatGPT, then is followed by unrealistic expectations, which are eventually dashed. A lot of early-stage entrepreneurs can fail along the road, even if a technology eventually gains widespread usage.
“There’s a question about where we are in that curve with AI, where the hype is so visible,” said Mark Hawtin, investment director at GAM Investments. “There are ways to get exposure to the (AI) theme without picking something that is highly valued.”
In order to support potential “big beneficiaries in terms of providing infrastructure,” as per Janus’ Porter, organisations who have a track record of success should be backed. These tendencies in generative AI are currently unknown.
According to GAM’s Hawtin, he has also sought out businesses that offer the “picks and shovels” required to enable new AI technology.
For instance, massive amounts of data are needed for AI systems to analyse and learn from, yet according to Bank of America, just 1% of the world’s data is now being collected, stored, and used.
For this reason, he claimed, Hawtin’s funds own chipmaker Marvell Technology and hard drive and data storage producer Seagate Technology.
When firms decide how to deploy AI, “I strongly think you call in the experts,” according to Jon Guinness, manager of the technology portfolio at Fidelity International.
The value of dominating tech stocks was one reason why Trevor Greetham, head of multi-asset at Royal London Investment Management, said he was “overweight” in them, although he advised against investing in stocks with an AI theme.
“There will be an awful lot of losing lottery tickets,” he said, recalling the dotcom crash of the early 2000s.
Fidelity’s Guinness, who is sticking with big tech, said his funds are invested in Amazon in part due to the company’s initiatives to reduce the cost of AI for commercial enterprises. For instance, instead of spending money on constructing their own generative AI models, businesses may customise them using Amazon’s Bedrock service.
“The big benefits of AI,” Janus’ Porter said, “are going to happen over the long term.”
“Investors want to invest in AI now and they expect things to happen now,” she added. “But we would never blindly buy into AI and we don’t do things at any price.”
(Adapted from Reuters.com)