Here’s where investors should look amid the artificial intelligence boom

The rise of ChatGPT has created another national buzz around artificial intelligence.

Depending on how you look at it, bots are the key to making many businesses and their employees more efficient, or the slippery slope for robots to eventually take over society and put millions out of work. Either.

The truth is probably somewhere in between, but what is clear is that all major tech companies believe AI will be the engine of huge profits in the years to come.

This has added fuel to the years-long arms race in AI. (Remember when everyone started pouring billions into self-driving technology?)

Naturally, investors are wondering who will be ahead. Becoming one or a combination of Amazon, Alphabet, Facebook, and Microsoft might seem like a safe bet. But it is difficult to know for sure.

History is littered with examples of companies that once enjoyed a dominant position in their industry. Yahoo! It was once synonymous with the internet and dominated search. He now has just over 1% of that market.

BlackBerry has been a status symbol since 2010 when it was the top smartphone platform. Today the device is mostly non-functional as the company shut down many services in the last year.

This is part of why investing in AI can be a classic pick-and-shovel strategy. Not only are Amazon, Alphabet, Facebook, and Microsoft all mature companies, there is no guarantee that they will become the undisputed kings of AI.

So regardless of who wins the AI ​​arms race, it may be safer to bet on companies that help make it happen. At the same time, those tackling AI head-on will pay a high price, so it’s probably best to wait for a better opportunity to jump in.

Today, the largest cloud service providers (hyperscalers) have millions of servers in data centers scattered across the country. Some of these servers running AI workloads (including chatbots, chess machines, self-driving cars, and everything in between) have to go through massive upgrade cycles to add capacity. .

Investors are watching.

iShares Semiconductor ETF — A collection of the 30 largest US publicly traded companies involved in the manufacture of memory chips, microprocessors, integrated circuits and related equipment — is up about 23% year-to-date. Digging deeper, some companies within that fund have performed even better.

Nvidia is profiting over 80% and Advanced Micro Devices, Inc. is profiting over 50%. Together, these companies control approximately 29% of the graphics processing unit market. GPUs are essential for AI as they help process large amounts of data.

Arista Networks, on the other hand, is up more than 30% this year. The company manufactures network switches for large data centers that enable connectivity between devices in the network. It enjoys a share of about 10% of that market.

These are all great companies and without them the AI ​​revolution would not move forward. Still, it’s almost impossible to claim any of them at their current ratings.

The banking industry has so far avoided disaster, and contagion fears associated with the shutdown of Silicon Valley and Signature banks, as well as issues related to Credit Suisse, have faded in recent days. That said, it is reasonable to expect tighter lending conditions across the banking sector in the near term.

That could dampen consumer spending and business investment and overwhelm an economy already struggling with higher interest rates and higher inflation. That would put pressure on stocks and lead to a broader selloff.

It’s not a great development overall, but adding exposure to AI from the likes of Nvidia, AMD, and Arista Networks could offer an opportunity to make the most of a bad situation.

— By Andrew Graham, Founder and Managing Partner of Jackson Square Capital