6 Tips for Buying AI Stocks

AI For Business


It depicts a humanoid robot looking at a stock chart.

Robot trading on stock market. Artificial intelligence for forex broker analyzing business charts with investment financial data. Computer software for trading on stock exchange. Cyborg trader.

AI stocks – or stocks that are exposed to the huge tailwind of artificial intelligence – are currently garnering attention from ASX investors.

There are no major companies in Australia, most of them Nasdaq 100 index (NASDAQ: NDX) are listed in the United States, several of which are members of the acclaimed Magnificent Seven. NVIDIA and Microsoft.

AI is certainly the next big thing in technology, but more than that, it is also seen as a potential solution to the long-standing problem of sluggish productivity growth in Western economies.

Henry Fisher of CMC Invest said demand for AI technology “is likely to be the defining trend of the decade.”

Writing in his asx.com.au blog, Fisher offers some tips for investors interested in AI stocks to consider.

I'll summarize a few here.

6 Tips for Buying AI Stocks

1. Understanding the AI ​​ecosystem

AI comes in many forms, including generative AI, cloud computing, robotics, AI chips (graphics processing units), data centers, etc. “Given the range of investment options, there is no one-size-fits-all approach, so it is important for investors to develop an understanding of the AI ​​landscape,” says Fisher.

2. AI stocks are still in their early stages

Investing early in new technology can be risky, said Fisher, noting that only 48 percent of dot-com companies survived after 2004, and many of those that did saw their stock prices fall sharply.

He commented:

In today's world of AI, there may be long-term winners and losers, and new AI companies may emerge in the future. Balancing these risks requires considering the uncertain timeline ahead and managing the fear of missing out.

3. But AI will evolve quickly

The speed of AI development and adoption is an important factor to consider, Fisher said.

The internet and mobile phones pave the way for AI tools to penetrate people's lives faster and become more integrated into their daily lives. It is essential to understand the rapid changes in AI trends, but it is also important to evaluate the potential risks and benefits that come with the pace of adoption.

4. Select and shovel AI stocks

Pick and shovel stocks are companies that provide the tools and services that industry needs, and Fisher reminds investors that AI stocks include the pick and shovel business.

In the case of AI, this could mean businesses such as chipmakers and data centers. These investments can be strategic, as they allow them to benefit from broader trends while maintaining diversified revenue streams.

But just as computers have gone from the size of a room to the size of the palm of your hand, AI hardware is likely to evolve over time: the tools that power AI five or ten years from now may be different from those we use today.

As we reported the other day, Australia's largest real estate investment trust (REIT) Goodman Group (ASX: GMG) is leaning into the AI ​​trend by building the data centres needed to make AI work.

AI was a big boost for Goodman in FY24, with its shares rising 73.1% on the back of buzz about AI.

5. ETFs provide diversification

Fisher said AI-focused exchange-traded funds (ETFs) could be a strategic way to capitalize on the trend, but he offered some caution:

Investors should be aware that ETFs can have very different holdings and strategies: For example, some ETFs include large technology companies, with AI being just one element of a diversified business, while others combine AI with other technology themes.

6. Competitive Environment

Fisher noted that the AI ​​industry is crowded with roughly 75,700 companies, and he wonders what “competitive advantage” looks like in this new world.

Startups with disruptive ideas can achieve more with less, as AI takes over a range of tasks and reduces the burden on employees.

Meanwhile, large technology companies can leverage network effects and economies of scale to integrate AI into their existing platforms.

In the world of AI, competition is crucial, as one company's software updates could put another company out of business.

A silly lesson about AI stocks

Fisher said AI is rapidly changing by nature, which means investors must be willing and able to keep up with evolving trends and quickly shift their investment strategies.

He recommends doing careful research before choosing which AI stocks to invest in.

“Taking a long-term, diversified approach to AI through an ETF is something to consider,” he said.



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