:max_bytes(150000):strip_icc()/GettyImages-1337928487-8028b164d3b94cc5b4a39c15777ffc92.jpg "Guide to Selecting the Best Artificial Intelligence (AI) Stocks")
Investing in artificial intelligence (AI) stocks is a prevailing topic in the financial media, as investors seek to capitalize on one of the most transformative sectors in the economy of the 2020s. AI, with its vast potential for applications in healthcare, finance, entertainment, and elsewhere in the economy, is not only reshaping potentially how many businesses operate but also how investors approach the technology sector.
Still, diving into AI investing requires knowing the unique attributes of a field characterized by rapid innovation, an evolving market, and anchored by established giants and emerging startups. This beginner’s guide will give you what you need to get started in this hyped and often-confusing sector.
Key Takeaways
- AI is a broad and fast-evolving field characterized by the development of algorithms and computational techniques that enable machines to perform tasks that typically require human intelligence.
- AI has been a leading discussion across many industries, including healthcare, finance, the automotive industry, retail, telecommunications, and agriculture, on the idea that it improves efficiency and effectiveness.
- When investing in AI stocks, several factors should be considered: market positioning, the financial health of the company, and the technology and product portfolio.
- Like any other investment, investing in AI stocks involves risks that investors should consider, including technological obsolescence, price volatility, and high valuations.
- Investing in AI stocks requires a strategic approach because of the technology’s dynamic and rapidly evolving nature. Staying informed about the AI industry, evaluating the business models of AI companies, and assessing their competitive advantages are part of your due diligence.
Before investing in AI stocks, it’s useful to know that this field differs from the more traditional industries. AI companies frequently command high valuations based on their growth potential rather than current earnings, making them attractive for their capital appreciation prospects and exposing investors to higher volatility and risk.
The industry’s reliance on continuous technological advances and a changing regulatory landscape relating to data use and privacy add further complexity. As such, a strategic approach that balances enthusiasm for AI’s potential with a pragmatic assessment of risks and market realities is essential for investors navigating this exciting yet challenging domain.
Understanding Artificial Intelligence (AI)
AI is a broad and fast-evolving field, characterized by the development of algorithms and computational techniques that enable machines to perform tasks that typically require human intelligence. Its applications span numerous industries, and proponents say it will significantly transform how businesses operate and deliver services.
There are aspects of AI for investors to understand first:
- Machine learning: This involves algorithms that allow computers to learn from and make predictions based on data.
- Natural language processing: This enables machines to understand and interpret human language, facilitating interactions between humans and computers.
- Robotics and automation: This involves enhancing the efficiency and capabilities of automated systems, typically in manufacturing and logistics.
- Computer vision: This means teaching machines to interpret and make decisions based on visual data, from photographs to live video streams.
The complex nature of AI—encompassing machine learning, natural language processing, robotics and automation, and computer vision—presents further prospects and challenges. As AI continues to evolve and be integrated into industries across the economy, understanding these is crucial for navigating this dynamic and potentially lucrative sector in a way that aligns with your investment strategies.
Applications of Artificial Intelligence (AI) Across the Economy
Discussions about the potential applications of AI are happening across many industries. In healthcare, AI algorithms can often analyze medical imaging faster and more accurately than human practitioners. In addition, AI may be able to accelerate the process of drug development by predicting how different compounds will behave.
In finance and investment, AI algorithms can analyze market data at a speed and depth beyond human capability. Moreover, AI systems may be able to assess risks in investments and credit scoring with greater accuracy.
In the automotive industry, AI is fundamental in developing self-driving cars, processing data from vehicle sensors to make driving decisions. AI may also be able to optimize production lines and predict maintenance needs in automotive manufacturing.
Regarding the retail industry, AI has long analyzed consumer behavior to present personalized shopping suggestions. AI may predict inventory needs, optimize stock levels, and reduce waste.
In agriculture, AI helps in monitoring crop health and soil conditions, leading to more efficient farming practices. Indeed, AI may even forecast environmental effects on crop yield.
In telecommunications, AI can enhance network performance and predict infrastructure failures. For customer service, AI powers chatbots and automates many customer interactions.
In entertainment and media, streaming services use AI to recommend personalized content.
For education, AI may be used to customize learning experiences for each student.
In cybersecurity, AI systems may be used to detect and respond to cybersecurity threats. Indeed, AI is used to monitor transactions for patterns indicative of fraudulent activity.
The potential for AI is vast, yet it brings ethical considerations such as data privacy, bias in decision making, and the impact on employment. Its applications are diverse, reflecting the adaptability and AI-backed processes. However, balancing innovation with ethical considerations should be front and center in assessing its evolution.
Factors to Consider When Investing in Artificial Intelligence (AI) Stocks
Here are just some of the factors that will help you assess the potential risks and rewards of investing in AI-related firms:
- Market position and competitive advantage: You should evaluate the company’s position in the AI market. Companies with a strong competitive advantage, a lead in technology, and intellectual property are generally better positioned for long-term success.
- Revenue growth and financial health: The company’s revenue growth, profitability, cash flow, and debt levels should be reviewed thoroughly. Consistent revenue growth and sound financial health are indicators of a stable investment.
- Research and development (R&D): Companies investing heavily in R&D could parlay that spending into advances later in the rapidly evolving AI field. However, high R&D expenses will also affect short-term profitability.
- Technology and product portfolio: You must assess and compare the company’s technology and product offerings to its competitors. A diverse portfolio that serves diverse industries should indicate resilience and potential for growth.
- Partnerships and collaborations: Affiliations with other major technology companies or industries can provide quicker access to large markets and improve technological capabilities.
- Regulations: You need to understand the regulatory environment in which the company operates, especially concerning data privacy, AI ethics, and potential antitrust issues. Regulatory changes can significantly impact AI companies.
- Global reach and scalability: Companies with a global presence and scalable products are usually better positioned to capitalize on the global AI market.
- Risk diversification: Investing in a single AI stock can be risky, which may lead you to diversify your investments across different companies or sectors within AI; e.g., through the top exchange-traded funds (ETFs).
- Long-term vision and strategy: You should also evaluate the company’s strategic vision. Companies should focus on current trends and have a clear long-term strategy for future growth.
- Customer base and market demand: The size and diversity of the company’s customer base and market demand are central.
Investing in AI stocks requires understanding the technical aspects of AI technologies and assessing the traditional financial metrics. It is important to keep up with the latest developments in the AI field, as the technology and market dynamics can change rapidly.
Notable Artificial Intelligence (AI) Stocks
There are a growing number of AI and AI-related stocks. Here are some of the most-discussed:
- C3.ai Inc. (AI): A California-based company that develops enterprise artificial intelligence software. The company recently expanded its collaboration with Amazon Web Services.
- Palantir Technologies Inc. (PLTR): The Colorado-based company builds and installs software development services for the U.S. intelligence community.
- EPAM Systems Inc. (EPAM): The firm provides digital platform engineering and software development services worldwide, including AI-powered platforms.
- SentinelOne Inc. (S): This firm provides cybersecurity with AI-powered autonomous threat prevention, detection, and response capacities.
- Nvidia Corp. (NVDA): The company is well-known for its advanced graphics processing units, a crucial element for AI and machine learning applications. Its latest AI chips are considered highly powerful, augmenting its already-strong position in the AI market.
- Microsoft Corp. (MSFT): Microsoft has been a key figure in the AI space, mainly through its partnership with OpenAI, the developer of ChatGPT. Microsoft also offers a suite of AI services through Azure, its cloud computing platform. It has its R&D teams developing AI applications, including its integration into its Office suite of products.
- Baidu Inc. (BIDU): A Chinese internet search company developing the AI-driven ERNIE Bot.
- IBM Corp. (IBM): The company behind some of the oldest brands in the computer industry, IBM produces advanced computer chips, quantum computing applications, AI, and data infrastructure.
- Intel Corp. (INTC): Intel designs, makes, and sells computing and related products, operating in several segments, including data centers and AI.
- UiPath Inc. (PATH): The company specializes in robotic process automation, a key component of AI that helps automate routine business processes.
- Helix Energy Solutions Group Inc. (HLX): Helix is deploying AI in offshore energy, particularly in its robotics and automated oil and gas exploration and production processes.
- AeroVironment Inc. (AVAV): This company produces drones and tactical missile systems, where AI plays an increasing role in navigation, surveillance, and data collection.
- Pros Holdings Inc. (PRO): A tech company that develops AI-related tools aimed at helping businesses set prices, improve sales strategies, and manage revenue.
| Price Performance of AI and AI-Related Stocks | ||||
|---|---|---|---|---|
| Ticker | Name | 1-Month Return (%) | 1-Year Return (%) | 5-Year Return (%) |
| AI | C3.ai Inc. | 3.43 | 157.89 | -70.99 |
| AVAV | AeroVironment Inc. | -2.87 | 34.61 | 62.51 |
| BIDU | Baidu Inc. | 3.66 | -13.67 | -30.09 |
| EPAM | EPAM Systems Inc. | 12.49 | -7.24 | 134.62 |
| HLX | Helix Energy Solutions Group Inc. | -2.23 | 23.43 | 40.76 |
| IBM | IBM Corp. | -1.04 | 12.10 | 40.35 |
| INTC | Intel Corp. | 9.78 | 62.07 | -0.77 |
| MSFT | Microsoft Corp. | 3.58 | 67.57 | 269.75 |
| NVDA | Nvidia Corp. | 14.81 | 251.61 | 1438.05 |
| PATH | UiPath Inc. | -3.50 | 85.04 | -64.74 |
| PLTR | Palantir Technologies Inc. | -5.82 | 160.38 | 69.25 |
| PRO | Pros Holdings Inc. | -7.11 | 46.08 | 7.85 |
| S | SentinelOne Inc. | 2.07 | 82 | -46.74 |
These companies are noted for the significance of their advances, market position, and applications of AI technology in their fields. Their presence in the AI market is marked not only by their financial performance but also by how they have integrated AI for diverse industrial and business challenges.
Risks and Challenges of Investing in Artificial Intelligence (AI) Stocks
Investing in AI stocks, like any investment, involves certain risks and challenges to consider. Here are some of them:
- Adapting to AI: The commercial success of AI technology depends on how ready employees are to see AI adopted for use in their industries. Slow adoption will hinder growth and profitability.
- Competitive environment: The AI sector is highly competitive, ranging from startups to longtime tech giants. Standing out and capturing significant market share can be challenging for companies. This is especially the case if some competitors have the backing of their governments.
- Execution risk: This is a reality. Successfully developing and commercializing AI technology involves numerous technical hurdles, potential material and product delays, and cost overruns.
- Ethical AI: While most companies in the sector have webpages dedicated to processes they have in place to review the use of these technologies, there remain wider public concerns about its influence on jobs, the future of life online, bias in AI algorithms, and more that could lead to legislation barring certain uses of AI technology.
- Hype: Many AI companies, especially those in their growth phases, trade at high valuations based on future potential rather than their current earnings. This can make them more susceptible to market corrections.
- Regulatory scrutiny: The AI industry faces significant regulatory scrutiny, especially regarding data privacy, ethical use of AI, and antitrust concerns. Regulatory discussions are taking place not just in the United States but worldwide.
- Tech gets old fast: One risk is technological obsolescence. Rapid technological advances in AI could render existing technologies obsolete pretty quickly.
- Volatility: The market’s perceptions of AI’s potential have led to significant fluctuations in stock prices, sometimes based on speculative trends rather than solid financial fundamentals.
As with any investment, you should conduct thorough due diligence, stay informed about industry trends, and consider diversifying your investments to mitigate these risks.
Tips for Investing in Artificial Intelligence (AI) Stocks
Investing in AI stocks requires a strategy that can handle the technology’s dynamic and rapidly evolving nature. Here are some tips:
- Stay informed: Stay educated about the AI industry, including technological advances, market trends, and regulatory changes. This knowledge is crucial for making informed investment decisions.
- Business model evaluation: You must clearly understand how the company plans to generate revenue and profit from AI technology. Investors should look for companies with a transparent and viable business model.
- Competitive advantage assessment: You should get a handle on what gives a company a competitive edge in its part of the AI business. This could be an advance in technology it has made, proprietary algorithms, strategic partnerships, or a strong customer base.
- Investment diversification: Due to the inherent risks and volatility in the technology sector, it is wise to diversify investments across different AI companies and sectors. This can help mitigate risk.
- Fundamentals: You should review the company’s financial statements, focusing on revenue growth, profitability, cash flow, and debt levels. Financial stability is a key indicator of a company’s long-term viability.
- R&D investments: Companies investing heavily in research and development are more likely to innovate and stay ahead in AI. However, it’s not enough to advance what AI can do. The task is to make bringing it to market viable and profitable.
- Market potential: Companies best placed to grow are likely those in AI areas with high growth potential or industries undergoing digital transformation.
- Long-term perspective: AI is a field where significant returns may take time. Thus, it’s prudent not only to keep the long-term view in mind as you invest, but also to see if the company you’re reviewing is doing so.
- Regulatory environment: Investors should pay attention to the regulatory landscape, as it can significantly affect AI companies, especially those dealing with data privacy and ethics.
- Management quality: The quality and track record of the company’s management team should be reviewed. Experienced, well-networked leadership is crucial for navigating the AI market.
- Risk management: Consider your risk tolerance and invest accordingly. AI stocks can be highly volatile, so it is important to manage risk exposure.
- Seek professional advice: Consulting with financial advisors or investment professionals who understand the technology sector and AI industry should be considered, particularly if you are unsure about your knowledge of this relatively new tech area.
Combining a thorough understanding of the AI industry with sound investment practices will position you to better capitalize on the investment prospects in this growing field.
Is the AI Industry in a Bubble?
This is being debated among investors, analysts, and industry experts. Indications of a bubble include high valuations, a plethora of speculation, rapid investment growth, and extreme positive market sentiment (hype) that leads to irrational investment behavior.
While signs suggest some elements of the AI industry could be overvalued, there are also strong fundamentals supporting the growth and sustainability of AI as a transformative technology. Investors should exercise caution, conduct thorough research, and consider long-term trends when investing in this sector.
Are There any AI ETFs Available?
There are several exchange-traded funds (ETFs) that offer exposure to a basket of stocks from companies involved in the development, research, and utilization of AI. These include Global X Robotics & Artificial Intelligence ETF (BOTZ), iShares Robotics and Artificial Intelligence Multisector ETF (IRBO), and First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT).
Do AI Stocks Pay Any Dividends?
While some AI or AI-related stocks may pay dividends, the sector as a whole is growth-focused, with many companies reinvesting profits to fuel further expansion and R&D. Investors interested in AI and seeking dividends might need to look at larger, more diversified technology companies or consider AI-focused ETFs that include dividend-paying stocks.
The Bottom Line
Investing in AI stocks could bring significant growth, given the transformative influence of artificial intelligence across many industries. However, it’s important to recognize the unique characteristics of this sector.
AI stocks are marked by high-growth expectations and rapid technological advances, which can lead to inflated valuations and increased volatility. Many AI companies, particularly those in early development stages, prefer reinvestment in technology and market expansion over paying dividends, focusing more on long-term capital appreciation than immediate income generation.
Additionally, the AI sector is influenced by factors such as regulatory changes, ethical considerations of AI technologies, and the competitive landscape. All of these can influence stock performance.
If you’re considering AI or AI-related stocks, you need to account for these dynamics. This includes conducting thorough research to understand the potential and risks associated with AI investments, diversifying across different companies and subsectors within AI to mitigate risk, and maintaining a long-term investment perspective to navigate the inherent volatility. Balancing these considerations with traditional investment analysis will help you make more informed decisions and potentially capitalize on the growth opportunities that AI presents.