Piling on the latest mania to hit Wall Street, retail investors appear to be bidding up enterprises directly related to artificial intelligence. The enthusiasm centers on OpenAI and its AI chatbot called ChatGPT. Supported by tech giant Microsoft (NASDAQ:MSFT), ChatGPT may shift the paradigm for internet-based interactions. That has money flowing into certain AI stocks.
Some of the top beneficiaries today include enterprise application service C3.ai (NYSE:AI), data analytics provider BigBear.ai (NYSE:BBAI) and audio and speech recognition company SoundHound AI (NASDAQ:SOUN). At the time of this writing, these AI stocks are respectively gaining about 18%, 40% and 42%. Year-to-date (YTD), their performances are even more impressive, respectively skyrocketing about 130%, 590% and 114%.
According to Yahoo! Finance, ChatGPT “has become wildly popular in the Internet and spurred discussion over efficiencies in the workplace.” In addition, veteran tech experts like Ark Invest founder Cathie Wood have weighed in on the situation, explaining how companies must explore AI integration for their businesses:
“AI is going to enable the most massive productivity increase in our history […] We think the productivity gains is going to be astounding and shocking.”
Wood also warned that “companies who do not embrace this rapidly enough are probably going to lose competitively.” With such a call to action, then, investors are naturally moving into AI stocks. Still, the narrative here requires some significant due diligence. Investors need to do their research before making a heavy investment.
AI Stocks Enjoy Strong Sentiment, but the Sector Warrants Caution
Advanced digitalization represented a key theme during the tech-centric earnings disclosures earlier this week. That inherently boosted the narrative for AI stocks. For example, Meta Platforms (NASDAQ:META) CEO Mark Zuckerberg notably stated that the company is “deploying AI tools to help our engineers to be more productive.” When IBM (NYSE:IBM) discussed its quarterly results, CEO Arvind Krishna also said that “AI is projected to contribute $16 trillion to the global economy by 2030.”
In particular, cybersecurity firms appear poised to contribute a significant portion of demand that may filter down to various AI stocks. As pointed out by Yahoo! Finance, CFRA analyst Janice Quek recently said the following:
“Faced with shortages in IT talent and expertise, leveraging AI-enhanced software has been an effective way to combat cybersecurity challenges for many companies, while strengthening protection efficacy and reducing workload.”
Nevertheless, the sentiment doesn’t completely ring encouragingly for AI stocks. First, the sector’s total addressable market may not be as massive as some predict. According to Grand View Research, the global AI market may expand at a compound annual growth rate (CAGR) of 37.3% between 2023 to 2030. However, the culminating revenue by 2030 would stand at around $1.81 trillion. That’s not the $16 trillion predicted by Krishna.
On top of that, the ChatGPT craze itself might fade out. A few notable critics have labeled the technology as “not particularly innovative,” among other things. Therefore, it’s critical that investors conduct their own research before jumping aboard high-flying AI stocks.
Why It Matters
While some of the aforementioned AI stocks have enjoyed blistering gains today — and throughout the year so far — market participants should consider the broader framework. For instance, in the trailing one-year period, C3.ai has only gained 10%. That’s in sharp contrast to its triple-digit YTD return.
Other AI stocks aren’t even as lucky. BigBear.ai has gained just 1% in the trailing year while SoundHound has dipped more than 60%. Again, the volatility here underscores the importance of due diligence, regardless of all the enthusiasm.
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On the date of publication, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.