Investing in AI: How to avoid the hype
The AI boom brings new challenges for investors. AI-themed stocks are highly valued. Stick to Big Tech and not AI stocks – Investors
LONDON, May 26 (Reuters) – Seasoned technology investors are looking for undervalued opportunities in an overvalued space.
At stake is how best to invest in the potential of artificial intelligence (AI), which took a big step forward in November when Microsoft-backed OpenAI released its ChatGPT bot without breaking a bubble to let in
Shares of Nvidia (NVDA.O), which makes computer chips that train AI systems, have nearly doubled since the launch of ChatGPT. The market value of the company is around 940 billion US dollars, more than twice as high as that of the European Nestlé (NESN.S). Nvidia gained about 25% on Thursday alone after forecasting a jump in sales.
Shares in loss-making AI software company C3.AI, which topped the stock ticker, are up 149% this year, and Palantir Technologies (PLTR.N), which launched its own AI platform, is up 91% year-to-date .
Investors seek access to generative AI, the technology powered by ChatGPT that learns from analyzing huge data sets to generate text, images and computer code. Companies are trying to use generative AI to speed up video editing, recruiting, and even legal work.
Consultancy firm PwC estimates that AI-related productivity savings and investments will generate $15.7 trillion in global economic output by 2030, almost equal to China’s gross domestic product.
The question for investors is whether to jump on the AI bandwagon now or exercise caution, particularly as regulators become increasingly concerned about the technology’s potentially disruptive impact.
“There will definitely be winners in all of this,” said Niall O’Sullivan, chief investment officer, multi-asset for EMEA at Neuberger Berman. “It’s just very difficult to extrapolate that to the entire market.”
Reuters Graphics STILL EARLY
Rather than backing hot startups or rushing into highly valued AI-themed companies that may fail, seasoned investors are taking a sideways perspective and backing established tech companies that could benefit from the longer-term trend.
“It’s going to be just as transformative as the internet, like mobile internet, like the mainframe was,” said Alison Porter, technology fund manager at Janus Henderson, whose funds hold positions in Nvidia, with Microsoft being its largest holding.
However, Porter also warns that “we are still very early in AI use cases.”
She favors big tech giants like Microsoft (MSFT.O) and Alphabet (GOOGL.O) because they have “strong balance sheets” that allow them to “invest in many different technological advances,” including their recent focus on AI.
BEWARE, THE HYPE
Soaring valuations have made some investors wary ahead of the tech hype cycle. This concept, popularized by consulting firm Gartner, starts with a trigger like the launch of ChatGPT, followed by inflated expectations and finally disillusionment. Even if a technology catches on at scale, many early-stage innovators can fail along the way.
“The question is where are we on this curve with AI, where the hype is so visible,” said Mark Hawtin, investment director at GAM Investments. “There are ways to deal with the (AI) topic without choosing something that has a high priority.”
Reuters Graphics Reuters GraphicsPICKS, SCOOP
Janus’ Porter recommended supporting proven companies that could be “big beneficiaries in infrastructure deployment” for future trends in generative AI that are currently unclear.
GAM’s Hawtin said he’s also been looking for companies that supply the “picks and shovels” needed to adopt new AI technology.
For example, AI systems require massive amounts of data to analyze and learn from, but according to Bank of America, only 1% of the world’s data is currently collected, stored and used.
Hawtin’s funds hold Seagate Technology (STX.O), which makes hard drives and data storage products, and for that reason chipmaker Marvell Technology, he said.
Jon Guinness, technology portfolio manager at Fidelity International, said management consultancy Accenture is in his portfolio because “I really believe that when companies are thinking about using AI, you consult the experts.”
FLY AT BIG TECHNOLOGY
Trevor Greetham, head of multi-asset at Royal London Investment Management, said he was “overweight” in dominant technology stocks, in part because AI supported their valuations, but cautioned against AI-themed stocks.
“There’s going to be a lot of lost lottery tickets,” he said, recalling the dot-com crash of the early 2000s.
Fidelity’s Guinness is also sticking with Big Tech, saying its funds are holding Amazon, in part because of its efforts to make AI more cost-effective for businesses. Amazon’s Bedrock service, for example, allows companies to customize generative AI models instead of investing in developing them themselves.
“The big benefits of AI,” Porter said of Janus, “will show up over the long term.”
“Investors want to invest in AI now and expect something to happen now,” she added. “But we would never buy AI blindly and we don’t do anything at any price.”
Reporting by Naomi Rovnick; Additional reporting by Lucy Raitano. Edited by Dhara Ranasinghe and Sharon Singleton
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