There are few sectors of the stock market that are quite as exciting as the artificial intelligence sector. Eerily reminiscent of many works of science fiction, today’s technological innovation has brought us smartphones, televisions, and even homes that talk to you, providing intelligent answers in seemingly no time flat!
AI technology is quickly changing the way people do everything from order food to enjoy streaming entertainment, and as adoption of the technology continues, the opportunities in the space are only growing larger.
It’s no surprise to find intense investor interest in artificial intelligence stocks, but what exactly are the companies they represent doing, and should you be investing in them? Read on to learn more about this fast-evolving sector of the economy and how to go about investing in it.
What Are AI Stocks?
Artificial intelligence (AI) stocks represent companies that use machine learning and deep learning technologies in the development, manufacturing, sales, or operation of their products.
You own shares of Apple, Amazon, Tesla. Why not Banksy or Andy Warhol? Their works’ value doesn’t rise and fall with the stock market. And they’re a lot cooler than Jeff Bezos.
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While the concept of AI is nothing new, thanks to futuristic blockbuster films dating back decades, the real-world technology of AI is actually just beginning to emerge. As it does, drastic changes are being made to processes around the world. The stocks in this category capitalize on this trend.
Although the technology is relatively new, there are a wide range of AI-related products and services on the market today, most of which are provided by leading tech companies on a mission to push the limits of the human imagination.
When your cellphone talks to you, the search bar on a search engine fills itself, or you receive recommendations in your Netflix account, you’re having a one-on-one experience with artificial intelligence. Some of the most compelling types of AI companies include:
1. Personal Assistant Companies
Personal assistants are all over the place, and no, not the intern who follows an expert around performing menial tasks like getting coffee or picking up dry cleaning. I’m talking about the personal assistant that responds to you when you say “hey Siri” in the direction of your iPhone.
All the big tech giants from Apple (NASDAQ: AAPL) to Alphabet (NASDAQ: GOOG | GOOGL) to Amazon.com (NASDAQ: AMZN) have been working to perfect speech recognition algorithms that power personal digital assistants.
With Siri, Bixby, and Alexa around, there’s no question that can’t be answered, no directions too difficult to find, and no phone call that can’t be made hands-free. Not to mention, these companies are taking AI to the next level, using their artificial personalities to perform tasks like changing temperatures, turning on lights, and opening blinds in smart homes.
2. Autonomous Vehicle Companies
If you’re like many, one of the first times you heard about a self-driving car on the road was in 2014, when a Google car equipped with autonomous driving technology made news when it brought a blind man to the dry cleaner.
Lately, these cars that drive themselves have become a hot topic, with some of the biggest leaders in traditional vehicles, electric vehicles, and big tech bringing automation to transportation.
Some names that you may know in the race to mass produce vehicles that drive themselves include Apple, Tesla (NASDAQ: TSLA), Alphabet, Ford (NYSE: F), and General Motors (NYSE: GM).
However, these vehicles wouldn’t be possible without artificial intelligence. In order to make a car that can safely navigate itself through various obstacles on the road, the vehicle needs to be able to sense its surroundings and process what it’s seeing. This is where AI comes in.
AI is the technology used to process thousands of data points in a split second in order for the vehicle to be able to avoid obstacles, follow the laws of the road, and safely transport passengers and cargo from point A to point B.
3. Augmented Reality Companies
Whether it be a social media company that gives you the ability to turn yourself into a cartoon character with your smartphone’s camera or a company that creates glasses that transform the world around you, augmented reality is a technology that’s quickly gaining popularity.
As is the case with cars that drive themselves, these companies have created technology that is able to take what it’s seeing and transform it into what the user wants to see, analyzing thousands of data points in real time.
4. Chip Makers
Artificial intelligence wouldn’t be possible without new technologies that give computers the ability to process a large amount of data in a short period of time. For example, NVIDIA (NASDAQ: NVDA) is the inventor of the graphics processing unit, or GPU.
According to Forbes, the company’s semiconductors and other microchips have been part of just about all of the best artificial intelligence breakthroughs in recent history.
Today, there are several companies that develop and manufacture the microchips needed to make AI possible, generating significant revenue in the process.
5. Cloud Computing Companies
Cloud computing is part of the technology that makes artificial intelligence possible. Top-notch computers and servers are necessary for an AI to comb through all the data as quickly as it needs to.
This is where cloud computing companies come in.
With most AIs, data is sent to data centers, where it is processed and returned to the end user. Some of the most popular companies in the cloud computing space include Amazon Web Services (AWS) from Amazon.com, Google Cloud Platform, and International Business Machines’ (NYSE: IBM) IBM Cloud.
6. Data Management Companies
There’s also a long list of data management companies that use artificial intelligence as a way to provide better services for their customers. For example, Salesforce.com (NASDAQ: CRM) provides the leading customer relationship management software for businesses and is also a great source for leads for sales departments.
Salesforce.com has used AI to increase the likelihood that a lead will turn into a sale. Not to mention, AI is a driving force of their customer relationship management platform — the company’s core product — offering in-depth data analytics to help lead to more efficient processes.
7. Health Care Companies
Health care companies are also seeing increased uptake of artificial intelligence technology. Drug development companies are using artificial intelligence to find cures for various forms of cancer, Alzheimer’s disease, and Dravet syndrome.
Tech companies are also stepping in, offering up their AI platforms in the race for cures. One of the best known is IBM Watson Health, an artificial intelligence that helps meet the needs of clinics, processes data from clinical studies, and more.
What to Look For in AI Stocks
What exactly should you be looking for when making investment decisions in the artificial intelligence space? What are the characteristics of the best AI stocks?
Companies With a Proven Ability to Lead
Some of the best stocks in the AI industry have been the best tech stocks for years. These companies have a proven track record of dominance in their core business. For example, Google is the dominant player in search and advertising, and it happens to be a great AI stock pick too.
When investing in emerging industries like AI, it’s a wise idea to find companies that are in the space and also have a long history of dominance, revenue and earnings growth, and return of value to investors.
Artificial intelligence is at the forefront of innovation. It’s not only the next big thing, it’s part of many next big things, like driverless vehicles, improved defense, and financial tools. Any time you invest in a company that’s active in such an innovative market, it’s important that the company itself is, well, innovative.
Throughout history, there have been examples of companies at the forefront of technology that lacked the ability to continue innovating, only to become distant memories. Do you remember BlackBerry and MySpace?
Before making an investment in the AI space, take the time to do a bit of research into what the company is working on. Look not only at what they’re building today, but what they plan to work on in the future as well. After all, the company’s level of innovation will directly relate to your level of returns.
Institutional investors like investment banks, hedge funds, and investment-grade funds have a fiduciary responsibility to their investors to make the wisest investments they can. These companies do extensive research before risking big money when they invest.
So if there’s a large and growing audience of institutional investors involved in a stock you’re considering, there’s a strong chance it’s a quality investment.
Before investing, take the time to learn the percentage of the company that’s owned by institutional investors and which institutional investors are piling their money into it. Getting an understanding of institutional interest will help you gauge the quality of stock you’re considering investing in.
There are plenty of companies in the AI sector that haven’t yet reached profitability, and if you’re a newcomer to investing, you should avoid them like the plague. Instead, look for companies that already have products on the market, are already generating revenue, and are experiencing growth in profitability.
Many of the best AI stocks double as growth stocks. These companies have developed some of the most competitive technologies, leading to heavy demand from consumers and justifying their exponential growth in the stock market.
Pros and Cons of Investing in AI
As with any other corner of the stock market, investing in artificial intelligence stocks will have its ups and downs.
AI Stock Pros
There are several reasons to be excited about an investment in an innovative AI player. These companies themselves are exciting, and being known for the ability to generate significant investor interest and share price appreciation makes many of these names great investment opportunities. Some of the factors investors like most about the AI industry include:
1. AI Is Becoming a Part of Life
Even the simplest tasks like making a phone call or turning on a light are getting artificial intelligence upgrades. As AI continues to become ingrained in the consumers’ daily lifestyle, demand will continue to climb and opportunities will continue to be abundant.
2. The Industry Is Exciting
Investing comes with a great deal of research. It’s best to invest in a company that grabs your attention, making that research more enjoyable. AI companies tend to do just that, offering the opportunity to learn about exciting new technology that’s reshaping the world as you know it.
3. Investments Can Be Very Profitable
The technology sector is known for generating significant profits. When a tech company hits with a new innovation, it tends to be a big hit, sending its stock valuation skyrocketing.
Just think about Amazon.com. Only 10 years ago, the stock was trading at just over $200 per share. Today, it’s trading with a price tag well over $3,500 per share, and it’s not the only company in the tech or AI space that’s seen such dramatic growth.
AI Stock Cons
No matter what industry you’re looking into, there will be downsides to investing. Some of the drawbacks to investing in the AI space include:
AI can do quite a bit more than most people give it credit for. It’s being used in countless areas of business, resulting in a highly fragmented market.
While there are clear leaders in areas like cloud computing and semiconductor manufacturing, other areas of the industry have several small companies vying for their position as a leader. This can make pinning down a few of the best stocks in the space more difficult for the untrained eye.
Moreover, the high fragmentation opens the doors to shell companies making blanket promises trying to cash in on investor excitement around a technology, despite not having a viable business model or real product on the market yet, ultimately resulting in losses for their investors. As such, you’ll need to dive in deep when doing your research so you know exactly what you’re buying before you buy it.
Stocks in the AI sector are known for making dramatic moves higher when things go right — but when things go wrong, the declines can be just as dramatic, leading to significant losses. This high level of volatility also increases your risk as an investor.
3. Lack of Income
The research and development associated with creating technology that can reshape the world comes with some extreme costs. As such, many of these companies opt to hold onto their profits to cover these expenses, rather than paying them out to investors through share buybacks or dividends.
Who Should Invest in Artificial Intelligence?
As with any other type of investment, AI investments aren’t a one-size-fits-all solution. Those who are most well-suited for an investment in the sector have the following characteristics:
- A Desire to Learn. Even the world’s leading AI executives are learning new things every day, and the investors who take part in this industry should do so as well. As new technologies in the field become available, new opportunities will rise and old opportunities may fall prey to competition. The AI sector is a dog-eat-dog world where innovation is king and nobody is immune to competitors.
- Growth Is Your Strategy. Most stocks in the AI space that are doing well are known for generating significant growth. The growth investing strategy comes with its own pros and cons, but it’s the best way to tap into the sector. If you’re looking for income or value, you’re better off investing elsewhere.
- A Healthy Risk Appetite. AI is an emerging sector with new technologies being born seemingly every day. Emerging markets come with significant growth potential but are also known for significant volatility and increased risk. If you don’t have at least a moderate appetite for risk, these stocks wont fit into your portfolio very well.
How Much of Your Portfolio Should You Allocate to Artificial Intelligence?
As most successful investors will tell you, diversification is an important form of protection for any portfolio. By spreading your investments across various asset classes and sectors, you’re able to protect your portfolio from significant losses should one of your investments, or a group of your investments, realize losses.
The good news is that the AI trend is massive and spreading across other sectors like technology, health care, and transportation. Theoretically, you could invest a sizable portion of your portfolio in AI technology without running into any diversification-related issues.
However, it is important to limit your investment in any single stock, as is always the case. A great rule of thumb is known as the 5% rule. The rule stipulates that you should never invest more than 5% of your total portfolio value into any single stock or any group of high risk stocks.
For example, if your investment portfolio is worth $10,000, you should limit your investment in any single stock to $500, and only those you have the most confidence in should receive the full 5% of your portfolio value.
Keep in mind the 5% rule stipulates maximum — not minimum — investments. If you want exposure to a stock but aren’t sure about it, there’s no shame in investing $50 or $100 to gain exposure without taking on too much risk.
AI-Focused ETFs Are a Great Choice for Beginners
Finally, choosing a list of 20 or more stocks to buy in order to create a well-diversified portfolio will take quite a bit of research. However, if you’re a beginner who doesn’t quite understand the market or you simply don’t have time for the research involved, there is another option.
Exchange-traded funds (ETFs) pool money from large groups of investors, using that cash to invest based on the goals of the fund, and there are plenty of ETFs focused on the AI industry.
By investing in these funds, you’ll end up with a highly diversified list of stocks in the artificial intelligence space that’s managed by some of the greatest minds on Wall Street. The amount of research required for successful ETF investments is significantly less than for picking your own diversified list of individual stocks.
The artificial intelligence sector is an exciting one. After all, AI is changing the way of life for all of us, and any time a change like this happens, watching the evolution is an exciting process.
Nonetheless, with so much interest in AI, it seems like every publicly traded company in the world is doing something in the space, making the market highly fragmented and adding difficulty to the process of choosing strong opportunities.
Nonetheless, with adequate research, finding diamonds in the sector is very possible, creating investment opportunities that are hard to ignore.