Analysis: Investing in AI: how to avoid the hype

Cognex

26/05/2023 06:10

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      AI boom brings fresh challenge for investors
    

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      AI-themed stocks highly valued
    

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      Stick with big tech not AI stocks - investors
    

  
    By Naomi Rovnick
       LONDON, May 26(Reuters) - Experienced tech investors are
hunting for undervalued opportunities in an over-valued space. 
    At stake is how best to invest in the potential of
Artificial Intelligence (AI), which took a leap forward in
November when Microsoft-backed OpenAI released its ChatGPT bot,
without buying into a bubble. 
    Shares in Nvidia  NVDA.O , which makes computer chips that
train AI systems, have almost doubled since ChatGPT's launch.
The company's stock market value at roughly $940 billion is more
than double that of Europe's Nestle  NESN.S . Nvidia surged some
25% on Thursday alone after forecasting a sales jump.
    Shares in loss-making AI software company C3.AI, which
grabbed the stock ticker  AI , have risen 149% this year and
Palantir Technologies  PLTR.N , which has launched its own AI
platform, is up 91% year-to-date. 
    Investors are chasing exposure to generative AI, the
technology run by ChatGPT that learns from analysing vast
datasets to generate text, images and computer code. Businesses
are trying to use generative AI to speed up video editing,
recruitment and even legal work. 
    Consultancy PwC sees AI-related productivity savings and
investments generating $15.7 trillion worth of global economic
output by 2030, almost equivalent to the gross domestic product
of China. 
    The question for investors is whether to jump on the AI
train now, or exercise caution, especially given mounting
concern amongst regulators about the technology's potentially
disruptive impact.
    "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 that’s very hard to
be true for the entire market."
    
    STILL EARLY 
    Instead of backing hot start-ups or rushing into highly
valued AI-themed businesses that might fail, seasoned investors
are taking a lateral view to back already proven technology
companies that might benefit from the longer-term trend. 
    "It's going to be as transformative as the internet, as the
mobile internet, as the mainframe computer was," said Alison
Porter, a tech fund manager at Janus Henderson, whose funds have
positions in Nvidia, with Microsoft as their largest holding. 
    However, Porter also cautions that "we are still very early
on the use cases for AI." 
    She favours big tech groups like Microsoft  MSFT.O  and
Alphabet  GOOGL.O  because they have "strong balance sheets",
that make them "able to invest in many different technology
advances", including their recent focus on AI.
    
    BEWARE, THE HYPE
    Dizzying valuations have made some investors wary of the
technology hype cycle. This concept, popularised by consultancy
Gartner, starts with a trigger, such as the launch of ChatGPT,
followed by inflated expectations and then disillusionment. Even
if a technology moves to mass adoption, many early stage
innovators can fail along the way. 
    "There's a question about where we are in that curve with
AI, where the hype is so visible," said Mark Hawtin, investment
director at GAM Investments. "There are ways to get exposure to
the (AI) theme without picking something that is highly valued."
  
    PICKS, SHOVELS
    Janus' Porter recommended backing proven companies that may
be "big beneficiaries in terms of providing infrastructure," for
future trends in generative AI that, as of now, are unclear. 
    GAM's Hawtin said he has also hunted out companies that
provide the "picks and shovels," necessary for enabling new AI
technology.  
    For example, AI systems require huge volumes of data to
analyse and learn from, but just 1% of global data is currently
being captured, stored and used, according to Bank of America.  
    Hawtin's funds hold Seagate Technology  STX.O , which makes
hard drives and data storage products, and chipmaker Marvell
Technology for this reason, he said. 
    Jon Guinness, tech portfolio manager at Fidelity
International, said management consultancy Accenture  CAN  is in
his portfolio because as businesses consider how to use AI, "I
strongly think you call in the experts."     
    
    STICKING TO BIG TECH
    Trevor Greetham, head of multi-asset at Royal London
Investment Management, said he was "overweight" in dominant tech
stocks in part because AI supported their valuations, but he
cautioned against AI-themed stocks. 
    "There will be an awful lot of losing lottery tickets," he
said, recalling the dotcom crash of the early 2000s.
    Also sticking with big tech, Fidelity's Guinness said his
funds hold Amazon, partly because of its efforts to make AI less
expensive for businesses. Amazon's Bedrock service, for example,
lets companies customise generative AI models rather than invest
in developing them themselves. 
    "The big benefits of AI," Janus' Porter said, "are going to
happen over the long term." 
    "Investors want to invest in AI now and they expect things
to happen now," she added. "But we would never blindly buy into
AI and we don't do things at any price."        

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Trigger event    https://tmsnrt.rs/3MVdsE5
AI excitement AI excitement    https://tmsnrt.rs/3MQz1pl
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 (Reporting by Naomi Rovnick; Additional reporting by Lucy
Raitano. Editing by Dhara Ranasinghe and Sharon Singleton)
 ((Naomi.Rovnick@thomsonreuters.com;))