Artificial intelligence (AI) is already becoming the defining market trend of 2023. OpenAI took the world by storm in 2022 when it released ChatGPT, a free chatbot that quickly captured public fascination… Big Tech also took notice.
And the U.S. government has even taken action, forging an agreement with the European Union to work together to maximize AI’s efficacy. National Security Adviser Jake Sullivan said…
This collaborative effort will drive responsible advancements in AI to address major global challenges with a joint development model and integrated research to deliver benefits to our societies through five key areas of focus: Extreme Weather and Climate Forecasting, Emergency Response Management, Health and Medicine Improvements, Electric Grid Optimization, and Agriculture Optimization.
Companies are rushing to procure a piece of the fast-growing market as AI stocks skyrocket. We’ll get to the implications on your portfolio in a minute, but first, let’s break down AI – what it is, where the phenomenon is going, and why a few choice stocks deserve your attention.
Artificial Intelligence Has Real-Time Applications
AI may seem pretty abstract, like a faraway technological breakthrough that invokes images of uber-intelligent robots attempting to overthrow the human race.
In actuality, you’re probably already using AI daily. Here are a few ways AI has already permeated our daily lives…
- Smartphone facial recognition…
- Virtual assistants like Alexa and Google Assistant…
- GPS turn-by-turn directions…
- And self-driving cars, to name a few.
And you know that creepy feeling you get when you scroll through your social media feed and land on an ad for a product you just Googled or inquired about on Alexa? That’s an AI platform as well – on Facebook, it’s called Facebook Pixel.
It’s easy to be leery and downright suspicious of AI platforms and software… it hasn’t even really reached its full potential yet. AI makes a lot of people uneasy – in fact, a Pew Research study found that AI concerned 37% of respondents, who believed it would impact privacy, job availability, and its potential to “surpass human skills.” But part of that joint initiative with the EU aims to address security and privacy issues by fighting AI… with AI.
There are plenty of ways in which AI actually makes us safer… on our devices, the roads, and in our homes – even our health can be enhanced with AI technology.
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Monetizing Emerging Technology
While last week’s big tech earnings reports reflected much speculation on how companies plan to monetize AI, don’t put all your eggs in that basket just yet.
The headlines about Microsoft Corp. (MSFT) using AI (ChatGPT) in its search engine, Bing, were difficult to ignore, for example.
ChatGPT is an AI platform that can do just about anything creative when given a prompt – give advice, write research papers, debug code, create content, and so much more. But for all that hype, Google will catch up to Microsoft – and soon. So this is a feature consumers should expect to have access to, regardless of their browser’s default search tool.
However, that is not to say that AI isn’t a big deal for the tech sector in the intermediate and long term. Take Microsoft. In the first quarter, MSFT reported earnings with its cloud computing platform Azure’s growth slowing to a “measly” 35%, which was slower than the 50% growth during the first quarter of last year. Traders reacted and sold MSFT shares, which have since rebounded modestly.
In our view, AI makes Microsoft’s cloud services (including Azure) more attractive for businesses. Machine learning, app development, large language models, and other AI features will create more revenue and profit opportunities this year.
Small and medium-sized businesses that needed access to enterprise-level tech resources drove the growth of cloud computing services, and the same will be true of AI integration. Traders that are pricing slower cloud services growth based on MSFT’s first-quarter performance have not accounted for the opportunity for AI to boost the sales and profitability of Azure. In our view, that makes MSFT undervalued.
Although we used Microsoft as our example, this argument is true for the AI leaders across the tech sector.
Alphabet Inc. (GOOGL) is investing in internal AI projects and startups like Anthropic, a rival to ChatGPT. Salesforce Inc. (CRM) and NVIDIA Corp. (NVDA) also look good as leaders in the AI space. However, any big investing theme will also have some pitfalls.
Investors should beware of companies in distress that start to get a lot of press (and spiking share prices) on speculation that AI is a short-term game changer.
For example, Buzzfeed Inc. (BZFD) quadrupled in price last month as its management said they are integrating AI into its content generation process. BZFD’s share price has been cut in half again, putting most of those buyers in a losing position now.
That part of the market feels a lot like the companies in 2000-2001 that started changing their names to include “crypto” or “blockchain,” even though they had no proven experience in monetizing that market. To profit safely in 2023, make sure you buy AI value, not AI hype.
Sincerely,
John and Wade
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