The first big investment wave in tech was the personal computer. Then came software, the internet, smartphones, social media and cloud computing.
The next big thing is artificial intelligence, or AI, professional stock pickers say.
AI is the science-fiction-like technology in which computers are programmed to think and perform the tasks ordinarily done by humans.
The size of the global AI market is expected to grow to $202.6 billion by 2026, up from $20.7 billion in 2018, according to Fortune Business Insights. Funding of upstart AI companies by venture capitalists remains brisk. Last year, 956 deals valued at $13.5 billion took place through the third quarter, putting AI deal activity on pace for “another record year,” according to PitchBook-NVCA Venture Monitor.
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Mike Lippert, manager of the Baron Opportunity fund, says AI touches more than half of the 60-plus stock holdings in his mutual fund. Those stocks are all about innovation, transformation and disruption, three traits AI has in abundance.
“I won’t claim AI is in every stock in the portfolio, but it’s all over my portfolio,” Lippert tells USA TODAY.
AI is creeping into every business, boosting productivity, customer service, sales, product innovation and operating efficiency. The technology is all about crunching reams of data from around the world, making sense of it and using the information to help businesses add services and operate more efficiently.
“AI applications can be found in virtually every industry today, from marketing to health care to finance,” Xiaomin Mou, IFC’s senior investment officer, wrote in a report.
It’s paving the road to driverless cars, making decisions such as what lane to drive in and when to stop. It’s behind the software that tells salespeople which client prospect to call first. It’s the brains behind virtual assistants that can interpret voice commands and play songs or provide weather updates.
“There are not a lot of companies, especially if they are growing, that are not benefiting from AI in some ways,” Lippert says.
The potential danger of AI, Lippert notes, is that advances such as autonomous driving and more sophisticated machine learning will take jobs from workers.
How can investors who want to get in early on the next Microsoft, Amazon, Apple or Facebook gain exposure to AI in a way that gives them the potential to profit over the long term without too much risk?
Investors must take a long-term approach and not just bet on one or two companies they think will emerge as big winners in AI, says Nidhi Gupta, technology sector leader at Fidelity Investments.
“Diversification is really important,” Gupta says, adding that investing in AI exposes investors to a “wide range of outcomes.”
In searching for AI winners, look for three things to “unlock value,” Gupta says.
1. “Rich data sets” that help create the algorithms and apps that make people’s lives better.
2. “Scaled computing power” as big data centers with big servers are needed.
3. “AI engineering talent” to avoid brainpower “bottlenecks.”
Among the AI stocks to watch:
•Big AI platforms: Leading AI players include well-known, large-cap tech stocks Google parent Alphabet (GOOGL), Amazon (AMZN) and Microsoft (MSFT). These three companies have the rich data sets, computing power and AI engineering talent that Gupta says are key to success.
•Chipmakers: Nvidia’s (NVDA) powerful and fast computer chips have been found effective for use in machine learning, AI training purposes, data centers and cloud-based computing. Another chipmaker with AI expertise is Xilinx (XLNX), says John Freeman, an analyst at Wall Street research firm CFRA.
•Companies benefiting from AI: Many businesses, such as Salesforce (CRM), stand apart from their peers and competitors by integrating AI into their business, says Baron’s Lippert. Salesforce Einstein AI, for example, analyzes all types of customer data, ranging from emails to tweets, to better predict which sales leads will convert to new business, he says. Netflix (NFLX) uses AI to recommend shows and programming viewers might like. China’s online retailer Alibaba (BABA) uses AI to crunch every customer interaction to make the online sales process smoother. Electric-car maker Tesla (TSLA) uses AI to enable software that is the driving force behind autonomous cars.
•Software makers: Other companies use AI to make software smarter and help solve business problems, Lippert says. Guidewire Software (GWRE), for example, uses AI to help insurers properly price policies, analyze risk, process submitted claims faster and identify insurance fraud. Adobe (ADBE) uses AI to analyze data to quickly identify cyberthreats. Datadog (DDOG) offers AI-inspired cloud monitoring services that let clients know if their web-based apps are behaving properly.
FICO (FICO) is best-known for calculating consumer credit scores. It uses AI to make sense of financial data to help clients, such as banks, determine the credit worthiness of borrowers or help detect fraud, CFRA’s Freeman says.
Investors who don’t want to pick their own stocks can invest in a tech-focused mutual fund or an ETF that focuses specifically on AI. Some examples include iShares Robotics & Artificial Intelligence ETF (IRBO) and Global X Robotics & Artificial Intelligence ETF (BOTZ).
“I do think AI is as significant an investing opportunity as the first era of computers,” Lippert says.
Investors should expect bumps in the road investing in AI, Freeman warns.
“This is a multi-decade trend,” he says. “AI is going to go through some mini-bubbles as well as some very healthy cycles.”