How to invest in AI
Artificial intelligence is already writing kids’ essays, producing new computer programs and helping scientists seek cures for cancer. It also promises lower costs and bigger profit margins for millions of businesses.
By 2030, a new report from the consulting firm McKinsey predicts, AI could increase global productivity by more than 3%, adding trillions to the world’s wealth.
Microsoft founder Bill Gates, who knows a thing or two about technology, calls AI a “revolutionary” development that will likely soon “be able to do everything that a human brain can, but without any practical limits. This new technology can help people everywhere improve their lives.”
There’s a dark side to AI, too: It might also empower criminals, eliminate millions of jobs or even spin out of control and kill us all, AI alarmists say.
Extravagant claims about the potentially world-changing impacts of computers that can learn and reason on their own are raising hopes — and fears — around the world. The hype is also sending the stocks of AI-related companies soaring.
That creates challenges for investors interested in benefiting from AI but afraid of a repeat of 2000, when the dot-com bubble burst. Big technological innovations “are often overhyped in the near term,” warns Dan Fletcher, portfolio manager of the DWS Science and Technology
fund. But “they are underappreciated for the long term.”
Right now, “the market is indiscriminate,” Fletcher says, inflating many companies with only tangential connections to AI. But there’s still opportunity for disciplined investors who do their homework and either have an investment horizon long enough to withstand potential volatility or who can wait to buy during the inevitable dips.
Veteran tech analysts say investors should ask three key questions to find companies with good chances to win the AI race:
How real is the firm’s commitment to AI?
During the current frenzy, “every company is going to be saying it is using AI,” says Afroz Jaffri, an AI expert at research firm Gartner. “Those claims need to be verified.”
Portfolio manager Gregg Fisher, who currently runs Quent Capital, says he checks the résumés of company leaders and in-house technologists to see if they really have AI expertise. And he looks at company statements from the past several years. Did the company use data analytics and machine learning before AI became all the rage? And, importantly, what percentage of a firm’s revenues and profits are AI-related?
Are the business and the stock fundamentally sound?
Ryan Jacob, manager of the Jacob Internet Fund, says one lesson from the dot-com bust is that investors who ignore fundamentals will get burned. A strong balance sheet showing that a company has the resources to compete and expand is a must, he says.
What part of the AI chain does the company serve?
Businesses in nearly every sector will be experimenting with ways to profit from AI. Many, if not most, of those efforts will fail. Many experts say that for now, it is safer to invest in the companies that provide AI tools to the experimenters. DWS’s Fletcher says that means generally focusing on firms that design or make AI-related equipment or software for others to use.