How to See Past the Hype When Investing in AI

Expert tech investors are on the lookout for bargains in an increasingly expensive market.

The question at hand is how to invest in the potential of Artificial Intelligence (AI) without buying into a bubble, following the significant advancement made in the field in November when OpenAI, backed by Microsoft, released its ChatGPT bot.

Nvidia (NVDA.O) stock has increased by close to 100% since the introduction of ChatGPT because the company produces chips used to train AI systems. Its market cap of $940 billion is roughly twice that of Nestle (NESN.S) in Europe. Nvidia gained about 25% on Thursday after the company announced it expected a rise in sales.
Palantir Technologies (PLTR.N), which has released its own AI platform, is up 91% year-to-date, while shares of loss-making AI software company C3.AI, which grabbed the stock ticker, are up 149%.

Generative AI, the technology managed by ChatGPT, generates text, images, and computer code by learning from and analyzing massive datasets. Video editing, hiring, and even legal work are all processes that businesses are trying to find ways to speed up with generative AI.

By 2030, PwC predicts that productivity gains and investments in AI will boost the global economy by $15.7 trillion. This is nearly as much as China's GDP in 2017.
Investors must decide whether to hop on the AI bandwagon now or to proceed with caution, especially in light of growing regulatory anxiety about the technology's potentially disruptive effects.

Despite the challenges, "there are clearly going to be winners in all this," said Niall O'Sullivan, chief investment officer of multi-asset for EMEA at Neuberger Berman. It's just that it's unlikely to hold true across the board in the market generally.

STILL EARLY

Experienced investors are taking a longer-term view and backing established technology companies that may benefit from the trend rather than risking their money on hot start-ups or highly valued AI-themed businesses that may fail.

According to Alison Porter, a tech fund manager at Janus Henderson whose funds hold positions in Nvidia, Microsoft is their largest holding. "It's going to be as transformative as the internet, as the mobile internet, as the mainframe computer was," Porter said.
On the other hand, Porter stresses that "we are still very early on the use cases for AI."

She believes that large tech companies like Microsoft (MSFT.O) and Alphabet (GOOGL.O) are best because of their "strong balance sheets," which allow them to "invest in many different technology advances," like the recent emphasis on artificial intelligence.

BEWARE, THE HYPE

Some investors are wary of the technology hype cycle because of the dizzying valuations. This theory, popularized by research firm Gartner, begins with a catalyst, like the introduction of ChatGPT, and continues through a period of unrealistically high expectations and eventual disappointment. Many pioneers may fall short before a technology reaches widespread use.

Mark Hawtin, investment director at GAM Investments, said, "There's a question about where we are in that curve with AI, where the hype is so visible." Without sacrificing quality, "there are ways to get exposed to the (AI) theme."
 

In order to capitalize on this longer-term trend, savvy investors are backing established technology companies rather than risking their money on trendy start-ups or overvalued AI-themed businesses.

According to Alison Porter, a tech fund manager at Janus Henderson whose funds hold positions in Nvidia, Microsoft is their largest holding. "It's going to be as transformative as the internet, as the mobile internet, as the mainframe computer was," Porter said.
And yet, Porter adds, "we are still very early on the use cases for AI."

She favors large tech companies like Microsoft (MSFT.O) and Alphabet (GOOGL.O) because they have "strong balance sheets," which allow them to "invest in many different technology advances," such as their recent emphasis on AI.

BEWARE, THE HYPE

Some investors are wary of the technology hype cycle because of the dizzying valuations. This theory, popularized by research firm Gartner, begins with a catalyst, like the introduction of ChatGPT, and continues through a period of unrealistically high expectations and eventual disappointment. Many pioneers may fall short before a technology reaches widespread use.

Mark Hawtin, investment director at GAM Investments, said, "There's a question about where we are in that curve with AI, where the hype is so visible." Without sacrificing quality, "there are ways to get exposed to the (AI) theme."