AI investing 2024: how to profit from the artificial intelligence boom
We look at whether investors can still make money from the boom in artificial intelligence.
Artificial intelligence – and how it’s set to revolutionise our lives – has become a hot topic of conversation these days.
But is it possible to make money from AI?
And which sectors and companies are most likely to benefit and how can you get involved?
Background: what is AI?
AI is an umbrella term covering how computers can perform tasks that would normally require human intelligence.
It includes everything from speech recognition to more complicated systems that can reason, analyse and achieve a high level of understanding.
This entire area is developing rapidly, according to a House of Lords study that assessed the potential benefits and the ways it can be regulated.
It stated: “From generative language models like ChatGPT to advances in medical screening technology, policymakers and the developers of the technology alike believe that it could deliver fundamental change across almost every area of our lives.”
What is the market potential?
The potential contribution of AI to the global economy is estimated to reach $15.7 trillion by 2030, according to a study by PwC, the professional services group.
“What comes through strongly from all the analysis we’ve carried out for this report is just how big a game changer AI is likely to be, and how much value potential is up for grabs,” it stated.
PwC also highlighted that AI was still very early in its development, even though some markets, sectors and companies were at a more advanced stage.
“One of today’s start-ups or a business that hasn’t even been founded yet could be the market leader in ten years,” it added.
Share price boom
The share prices of companies linked with AI have soared. For example, investors in Microsoft have enjoyed a 34% rise from $333.56 to $445.70 over the past year to June 20, 2024.
This hike follows the company’s impressive 20% increase in net income to $21.9 billion for the third quarter. Revenue, meanwhile, was up 17% to $61.9 billion.
Satya Nadella, its chairman and chief executive, highlighted the success of Microsoft Copilot, its generative artificial intelligence chatbot.
“Microsoft Copilot and Copilot stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry,” he said.
Cheaper to get involved
Another success story has been Nvidia, which stunned analysts by announcing a 265% increase in its fourth quarter revenues to $22.1 billion – and attributed the rise to AI.
Jensen Huang, its founder and chief executive, said: “Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations.”
Nvidia share price (image: Google)
While Nvidia’s valuation has been in the ascendancy for years, it’s just become cheaper to own as the company has made more shares available through a 10-for-one stock split.
According to Derren Nathan, head of equity research at Hargreaves Lansdown, this move doesn’t affect Nvidia’s value but increases the number of shares.
“The value of the shares grew over 10 times in the five years leading up to the division, causing the price to reach over $1,000,” he explained. “Following the split, they’re now trading at around $120, which is a more accessible level for some buyers.”
How to invest in AI
There are two ways to get involved in this area – and both have their pros and cons, according to Ben Yearsley, director of Fairview Investing.
The first is to buy shares in companies such as Nvidia that are integrated into the AI boom. The second is opting for a fund that invests in such stocks.
“Buying companies is extremely high risk but gets you closer to the theme, whereas buying a fund diversifies your risk but also reduces the purity of exposure,” he said.
Yearsley’s preference would be a fund – but even that isn’t a straightforward decision as there are thousands available.
“The question is: do you go for an AI fund such as Polar AI, a tech fund such as Polar Global Technology, or a broad-based fund such as Blue Whale Growth that often has AI themes,” he added.
Yearsley also pointed out it was important to monitor how much exposure to AI you had in existing stocks or funds. “AI is a long-term theme, however, the danger currently is that it’s overhyped and expensive,” he added.
AI opportunities: think big picture
Wise investors may search for less obvious ways to make money from AI than investing in the big names, according to Russ Mould, investment director at AJ Bell.
“The old story about the gold rush of the 1840s was that the suppliers of picks and shovels, and miners’ clothes, such as denim jeans, made more money than the gold diggers,” he said.
He suggested the providers of the “modern-day picks and shovels for AI developers” could be an interesting way to approach this area.
“Shrewdies are looking at alternative angles, such as the power and energy needs of large language models, data centres and servers and how those needs will be met, through infrastructure and raw energy production,” he explained.
The information included in this article does not constitute regulated financial advice. You should seek independent, professional financial advice before making any investment decision.
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