Artificial Intelligence (AI), often referred to in English as AI, is one of the hottest topics among investors. AI mania is in full swing. Goldman Sachs reports that its experts cannot recall any other topics generating as much buzz, with all of GS's clientele talking about AI developers and AI technologies, actively exploring the investment opportunities in this sector.
Unlike other recent hype stories such as metaverses or autonomous driving tech, which attracted a very niche group of investors, AI is drawing both small retail and large institutional players.
This broad interest has resulted in rising stock prices for companies in this sector. A select group of major AI tech stocks notably outperformed the broader market in 2023, with some stocks soaring by 200%.
How Long Will AI Last?
The issue of asset overvaluation is always easier to address with hindsight. For instance, during the software sector growth cycle (e.g., SaaS), dozens of companies traded with a multiplier above 10X (market capitalization to revenue ratio). Some issuers even reached a 50-70X multiplier. At the time, this seemed reasonable. Today, this behavior is seen by experts as a historical anomaly. The current enthusiasm around AI is fueling the surge in tech stock prices, though, on the whole, the sector is still far from historical extremes.
For example, AI leaders like Microsoft and Nvidia are trading only at moderate premiums to the average P/E ratios over the past five years, despite strong operational results this year and the buzz around AI technologies.
The market currently believes in the long-term potential of productivity created by AI, as the technology both operationally and conceptually impacts the entire high-tech sector. The influence of AI can be compared to the advent of affordable PCs in the 1980s, the internet in the 1990s, mobile gadgets in the 2000s, and the public cloud in the 2010s.
How Does the AI Hype Differ from the Blockchain Hype?
Some technologies that captivated investors' imaginations some time ago ultimately led to disappointment. Blockchain, despite its technological merits, hasn't produced a product with which investors could interact on public markets. The metaverse, which was expected to change our daily lives, and the idea that people would regularly wear Google glasses, came and went.
The idea of self-driving cars has evolved much slower than many investors anticipated five years ago.
However, it's worth noting that even when a technology eventually becomes established, its full integration takes time. For instance, the iPhone debuted in 2007, but Instagram only emerged three years later, and TikTok came into the scene nine years after. Thus, while investors are often over-enthusiastic about technologies and innovations in the short term, they usually underestimate the time factor. Broad-scale implementation takes time. It's a long cycle.
What Sets the AI Technology Cycle Apart from Many Other Tech Cycles?
The fundamental difference is the rate of change. ChatGPT became the fastest-growing app in history. It garnered over 100 million users in just two months, whereas TikTok took nine months to cross this threshold, and Instagram took 30 months. Nvidia is a prime example of astonishing profit growth. The company recently released a forecast predicting revenues of $11 billion for the summer quarter, which surpasses market expectations for this metric by 2-3 years. As such, the pace of change exceeds market expectations.
The core of investors' enthusiasm lies in AI technology's potential within corporate and consumer experiences. This technology isn't confined to a specific industry and has the potential to permeate absolutely every sector.
How are Investors Navigating the AI Segment on Public Markets?
The driving force behind investor interest in public markets was the idea that the Graphics Processing Unit (GPU) could play a crucial role in AI development and the training of large language models (LLM). However, over recent months, investors, such as Goldman Sachs' clients, have shown a willingness to broaden their scope of interest – from GPUs to adjacent segments. This includes everything required by semiconductor factories throughout the manufacturing cycle. The start of 2023 proved to be particularly strong for semiconductor manufacturers: their stock prices increased by an average of ~44% since the beginning of the year, marking the best performance since 2000.
The Pitfalls of AI
There's considerable uncertainty in the segment, especially when viewing the broader AI environment from an investor benefit standpoint. It remains unclear how end-users, both individuals and businesses, will effectively "purchase" AI products. As with any emerging technology segment, there will undoubtedly be companies that achieve revenue and growth. However, there will also be those whose business models do not lead to success.
Key Questions Investors Have About the AI Segment
Investors are focusing on many questions, which are central in current discussions about the industry's prospects. The main question is, what will drive primary growth? Will it be mergers and acquisitions or something else? How quickly will AI technology be implemented at the enterprise level and at the consumer level? Who will adopt the technology faster — humans or companies? Enterprises have clear advantages in scale, margin, and efficiency, but consumers have strong network interactions and a simpler mechanism for "adopting innovations". What is a genuine AI product, and what is a product that has been "on the shelf" for a long time, now rebranded as an AI product? Who is better positioned — incubator segments or private startups? Incubators certainly have scale, distribution, and data systematization advantages, but can they quickly modify AI architecture to suit dynamic realities... Or will new companies, "born" in AI, dominate the space due to their adaptability and flexibility? Will open LLMs become a widespread market product, and what are the implications for related industries? There are many questions, but very few answers so far.
Where Investors are Focusing
The market is trying to predict whether the excitement will turn into a bubble, or if there will be tangible impressive results and a powerful expansion of AI everywhere. For now, investors don't have many reference points. The main reference is signs of early successes in AI development by companies. Not necessarily in terms of financial metrics, but rather in terms of positive signals in companies' operational work, such as order growth, customer engagement, etc.
How to Invest in AI Right Now? The simplest way is to open an account (if you don't have one yet) with AMarkets and choose the most obvious AI segment stocks to purchase. One such stock is Microsoft (MSFT).
Microsoft
Microsoft's investment in artificial intelligence is a crucial strategic initiative for the company. Their partnership with OpenAI and the integration of advanced technologies into products like Bing and Microsoft 365 demonstrate the company's readiness to harness AI's potential to enhance user experience and boost productivity. Microsoft initially invested $1 billion in OpenAI in 2019. As part of the agreement, OpenAI moved its services to the Azure platform. Microsoft also became OpenAI's preferred partner for promoting new AI technologies. In 2021, Microsoft increased its investment in OpenAI. In January 2023, the company expanded its partnership with OpenAI. Microsoft Azure became the exclusive cloud provider for OpenAI. By this time, Microsoft had invested an additional $10 billion in OpenAI. According to the terms of the agreement between the companies, Microsoft will receive 75% of OpenAI's profits until its investments are fully recouped.
In 2023, Microsoft has been actively integrating OpenAI's technology into its suite of applications, underscoring the tech giant's commitment to staying at the forefront of innovation in the digital age.
One of the prime examples of this integration can be seen with Microsoft's search engine, Bing. Bing now harnesses the power of GPT-4, OpenAI's most advanced Large Language Model (LLM) to date. This incorporation not only revolutionizes the search experience for users but also emphasizes the leaps and bounds AI has made in understanding and generating human-like text. With GPT-4's deep learning capabilities, Bing can offer more contextually relevant, nuanced search results and possibly even understand user queries with unmatched depth, making the search experience more intuitive than ever.
However, Microsoft's tech prowess isn't limited to just AI. The company maintains a formidable presence in the cloud services sector. Azure, Microsoft's cloud platform, stands as one of the market leaders, offering businesses robust cloud computing solutions, ranging from data storage to AI services. Azure's versatility, combined with its scalability, makes it a top choice for businesses looking to transition to the cloud or scale their existing operations.
Beyond AI and cloud services, Microsoft is also making waves in the quantum computing arena. Quantum computing, often touted as the next frontier in computational technology, promises to solve problems that are currently beyond the reach of classical computers. By delving into quantum mechanics, Microsoft aims to build machines that can process massive amounts of data simultaneously, potentially revolutionizing industries like cryptography, medicine, finance, and beyond. Artificial Intelligence (AI) remains a hot topic among investors, generating a flurry of discussions and speculations about its potential. The AI boom is in full swing. Goldman Sachs highlighted this trend in one of its reports, noting that its experts haven't seen any other topics garnering such immense popularity. The entire Goldman Sachs client pool seems to be buzzing about AI developers and AI technologies. They are actively exploring investment opportunities in this segment, looking to capitalize on the transformative potential of AI in reshaping industries, consumer habits, and the broader digital landscape.
