So Your Clients Want to Invest in AI? Here's What to Know
What You Need to Know
Artificial intelligence is a potentially transformative technology, but it’s a very young industry.
Like the dot-com bust, many promising young startups won’t have what it takes to survive as the industry matures.
Investors should also be watching companies whose business models will likely benefit from advances in AI technology.
While the tech industry has been excited about innovations in artificial intelligence (AI) for years, the introduction of the consumer-facing ChatGPT has prompted far more interest among the broader public — including investors.
“ChatGPT really struck a chord with the public because it was usable and intriguing in a way that was novel and new,” says Ryan Jacob, portfolio manager of the Jacob Internet Fund.
But while it’s clear that AI applications have the potential to drastically accelerate the pace of technological change and disruption in many industries, the best way to invest in the burgeoning AI industry is more nuanced.
If your clients are asking about investing in AI, here’s what you need to know to respond intelligently.
Artificial Intelligence: An Overview
Artificial intelligence uses computing power to simulate human thinking to solve problems or complete tasks. ChatGPT is a form of “generative AI,” which means that it not only analyzes data but uses its predictions about that data to “generate” something. In this case, it uses AI to answer questions using data gleaned from millions of pages on the internet. It does not actually “know” anything, but it can predict the answers to questions using its understanding of the relationships between words.
However, there are many other use cases for AI and deep learning models beyond simple, text-based responses. AI is part of the technology powering innovation in self-driving cars and cloud computing, and machine learning could be used for everything from physicians looking for assistance with a patient diagnosis or treatment plan to uncovering cost savings at a manufacturing plant.
“Four or five years ago, artificial intelligence was seen more of a niche or thematic investment,” says Mike Loukas, principal and chief executive officer of TrueMark Investments. “Now it’s permeating so many levels of business and society and our everyday lives. As it becomes a more useful tool for businesses, I think the B2B application is going to become a more important component of investment portfolios.”
Is AI a Good Investment?
Artificial intelligence has the potential to be a good investment, but it’s important to understand that it’s a very young industry. For that reason, it’s difficult to determine with much certainty which stocks might benefit the most from AI capabilities.
That said, most large tech companies are investing in AI, seeing dominance in the category as key to maintaining a competitive advantage. The challenge for investors, of course, is determining which companies will gain (or lose) the most as AI matures.
Why Is AI So Hot Right Now?
The introduction of ChatGPT to the public on Nov. 30, 2022, sparked a rise of interest in AI. But the increased interest may also reflect ongoing volatility in the tech markets, which has many investors looking for the next big innovation that will drive growth in the sector.
Microsoft invested $1 billion in OpenAI, the creator of ChatGPT, in 2019 and is also heavily investing in building AI capabilities and tools into its Bing search engine. And while Google’s AI tool, Bard, has gotten off to a more rocky start after generating incorrect answers in a demo, the search giant’s focus on AI illustrates the importance of the technology.
What Is the Future of AI?
As more consumers and businesses transact online, there are increasing opportunities to incorporate the technology into our everyday lives. Some 44% of businesses are currently working to incorporate AI into their existing applications and processes, according to the 2022 IBM Global AI Adoption Index.
As the use cases for artificial intelligence continue to expand, the technology itself will improve as well. While ChatGPT, Bard and others right now are prone to factual errors, it’s likely that developers will find ways to make the technology more reliable.
“ChatGPT is just one manifestation of artificial intelligence, but it has the cool factor,” Loukas says. “But when you start looking at investments, you have to separate the buzz from the business model.”
What Are Some AI Companies to Invest In?
Investing in AI can take a lot of different forms, some more direct than others. In addition to focusing on companies building AI, investors might consider allocating to companies that may not be AI-centric but whose business models will likely benefit from advances in AI technology.
Other ways to invest in the coming AI boom include via adjacent industries, such as companies that specialize in cybersecurity, data processing or chip manufacturing, Loukas says, noting that AI needs all three in order to continue to grow.
To that end, Jacob says that he’s looking at companies like Cloudflare, which specializes in edge computing, and MongoDB, a developer database platform, and companies in the Internet of Things (IoT) space as having more upside than pure-play AI companies.
