Compare risks and rewards.
© Andrey Popov/Stock.adobe.com
Are you interested in artificial intelligence as an investment opportunity? The rise of generated AI, embodied by tools like ChatGpt, brings technology to internet users everywhere. AI startups are growing, and many legacy companies are developing important AI features.
Coupled with high performance expectations for the sector, the rapid growth of artificial intelligence means that AI stocks may have a volatile price performance. In other words, since ChatGPT was released in late 2022, “Hot Money” has been chasing the AI market, so many future growth may already be priced on these stocks.
If you are satisfied with the potential negative risk, it is logical to ask. What is the best way for your investment portfolio to get exposed to AI? Even if you don't want to predict the growth trajectory of a particular company, there are many options.
1. Buy stocks in legacy companies with AI exposure
One way to be exposed to your AI portfolio is to buy stocks at large tech companies that are meaningfully involved in technology. These companies have other business units with profit and risk profiles, so exposure to AI could be specifically diluted. However, this approach could benefit investors who may be more risk-averse.
Legacy companies typically have an established market position, providing stability to investors without compromising the company's ability to diversify its revenue streams and acquire the benefits of AI.
Naturally, the legacy organizations already involved in building and distributing AI systems are technology companies. Some have their own AI products designed for anyone to use. Others form important partnerships. Another category of companies is providing hardware and software for AI to thrive.
Three major high-tech companies have emerged as leaders in artificial intelligence.
- Google. Operated under the parent company alphabet (Goog), Google is the same as it began as a pioneer in AI and a pioneer in internet search. The tech giant has already created a generative AI chatbot called Gemini, formerly known as Bard. Google is deeply invested in AI research (why it won DeepMind in 2014) and applications, integrating artificial intelligence across a vast ecosystem of products and services. If you run into predictive text or new productivity tools while using Google applications, it's thanks to AI.
- Microsoft. Software giant Microsoft (MSFT) has undergone significant exposure to artificial intelligence through its partnership with OpenAI, the manufacturer of popular generator AI tool CHATGPT. OpenAI's advanced software is integrated with many Microsoft products, including the search engine Bing, Cloud Services Platform Azure, and Microsoft 365 (formerly known as Microsoft Office). Microsoft, like Google, uses AI to enable desktop productivity.
- nvidia. Legacy producers of advanced computing equipment, nvidia (NVDA) provides hardware and software to promote AI development. High-tech companies manufacture graphics processing units that can quickly process complex algorithms and large datasets, supporting deep machine-based learning and calculations. Nvidia also offers software for parallel computing and tools to accelerate AI workloads. Nvidia's Drive Thor is an AI computing platform built for autonomous driving.
2. Buy stocks at AI companies
Another direct way (i.e. “pure play” in industry jargon) adds AI exposure to your portfolio is to buy stocks in public AI-focused companies. This investment strategy requires research to identify stocks of interest, but choosing a winner can offer the most potential benefits.
But that's a big “if”. That's why investing in individual AI companies requires attention. Industry trends, regulatory developments, and technological advances are all relevant to you as an investor. When you have the expertise in the subject of staying up to date, you are perfect for making smart moves in your portfolio.
To start your research, there are two publicly available AI-centric software (SAAS) providers. The AI platform combines proprietary industry-specific software solutions. This is what we consider accounting, banking, healthcare, oil and gas services:
- c3.ai (ai). Using the ticker symbol “AI” makes it clear what C3.AI offers. The company supports a comprehensive application development platform and a variety of turnkey applications, both for enterprise AI.
- uipath. Uipath combines AI and automation to deliver value to businesses across the industry. Organizations use the platform to support AI-powered enterprise automation technology.
Certainly there are others. Given the amount of resources (and breathtaking media attention) that AI is gaining, we should expect more players to join this space. However, as of 2024, these companies' valuations are based on expected possibilities rather than actual revenue. Most, including C3 and Uipath, have yet to make profits.
Spanning the line between established AI leaders and pure play of AI is a software platform like Palantir (pltr). The company specializes in counterterrorism and cybersecurity, but the experience of finding patterns within large datasets has allowed it to explore pivots into AI.
3. Invest in companies that innovate using AI
If you're interested in AI but aren't excited to add technology companies to your stock portfolio, you can consider investing in companies in a variety of industries that are innovating using artificial intelligence.
If you want to pursue this strategy, there are many investment options. Here are a few:
- Big pharmaceuticals. The Pharmaceutical Giant Pfizer (PFE) is leveraging AI to accelerate the drug discovery and development process. The company has used AI machine learning in conjunction with cloud-based supercomputing to bring Covid-19 treatment Paxlovid to patients faster.
- Heavy machinery. Best known as a tractor company, John Deer (DE) Integrate AI into agricultural machinery. In 2022, the company announced a fully autonomous tractor that can make real-time decisions to optimize planting, harvesting and soil management.
- Clothing. Athletics Company Nike (NKE) uses AI to innovate in the retail sector. Already known for its focus on digital transformation, Enterprise in 2023 partnered with IT companies recognition (CTSH) Further integration of AI and hyperautomation into business processes.
4. Buy shares in public AI funds
If you have not selected stocks for individual companies, you can consider investing in the fund instead. Your typical options are Exchange-Traded Funds (ETFS) and mutual funds (as of 2024 there are no mutual funds dedicated solely to AI stocks).
Funds traded on exchanges with AI focus will invest in a basket of stocks to provide diverse AI exposures. As of early 2024, some of the top AI-centric ETFs by asset size include:
- Global X Robots & Artificial Intelligence ETF (Bots)
- Global X Artificial Intelligence & Technology ETF (AIQ)
- Robo Global Robotics & Automation Index ETF (Robo)
- iShares Robotics and Artificial Intelligence Multi-Sector ETF (IRBO)
ETF investments may be the most convenient way to get AI exposure, but they can also be the most diluted. A group of companies held by a particular ETF can focus on AI loosely, so before investing, pay special attention to its top holdings and research the fund. Also, as fund holdings tend to change over time, check in regularly to make sure your investments still meet your goals and risk tolerance.
Conclusion
You don't need to choose just one of these investment strategies. Taking a diversified approach can reduce investment risk. A risk-conscious approach may be wise as AI is an emerging sector where it is likely to experience sufficient volatility. Before investing your hard-earned money, do your own research and make sure you're making thoughtful investment decisions.
This article is intended for educational purposes only, not as an endorsement of a specific financial strategy, company, or fund. Encyclopædia Britannica, Inc. does not provide investment advice.
