đź–Ą Investing in AI

and some top names to consider

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A.I., Crypto & Tech Stocks

Exploring Artificial Intelligence as an Investment Opportunity

With the rise of generative AI tools like ChatGPT, AI is reaching more users globally, leading to a surge in AI startups and legacy companies developing advanced AI capabilities. However, the rapid growth and high expectations for AI stocks make this sector highly volatile, requiring careful consideration before making investment decisions.

Understanding the Volatility of AI Stocks

The AI market has attracted significant attention since the release of ChatGPT in 2022, leading to "hot money" driving up AI stock prices. Many investors have already placed their bets, meaning that much of the expected future growth may already be factored into stock prices. This volatility can create risks for investors, especially if market expectations outpace actual performance.

We have seen AI babies like Nvidia and Microsoft gain big and even smaller companies have benefitted from the wave. Fortunately, there’s still an opportunity.

How to Add AI Exposure to Your Portfolio

If you're intrigued by AI but wary of its risks, there are multiple ways to gain exposure in your investment portfolio. Below are some strategies to consider.

1. Investing in Legacy Tech Companies with AI Initiatives

One option for AI investment is buying stock in established tech companies that are actively engaged in AI development. These companies typically have diverse revenue streams, providing stability and reducing the risk associated with focusing solely on AI. While AI may represent only part of their overall business, their leadership in AI innovation offers considerable potential upside.

Some Top Names to Consider

  • NVIDIA: Nvidia, a semiconductor powerhouse that many either own or aspire to include in their portfolios is still a big AI player and one that should be a part of your portfolio.

    Initially gaining fame for its gaming chips, Nvidia has expanded its influence by becoming a leader in graphics processing units (GPUs) for data centers. This expansion comes at an ideal time, as the growing demand for AI has led to rapid growth in data centers, positioning Nvidia for long-term success. Despite a dip from its 52-week high, Nvidia still boasts a remarkable market valuation exceeding $2.5 trillion.

    Nvidia has also been active in forging key partnerships. Recent reports indicate the company has teamed up with G42, an AI-focused firm based in the United Arab Emirates, to advance climate technology. The collaboration aims to enhance the precision of global weather forecasting through AI-driven solutions.

    According to William Blair analyst Sebastien Naji, Nvidia’s expertise in designing parallel computing systems has historically made it a leader in niche markets such as gaming, automotive, visualization, and high-performance computing (HPC). However, with the surge in AI demand, parallel computing has moved to the forefront of the tech industry, driving immense demand for Nvidia's GPUs and its parallel computing technology. Naji recently initiated coverage of Nvidia with an Outperform rating, underscoring the company’s potential to maintain its leadership in this evolving landscape.

  • Google (Alphabet Inc.): Alphabet, the California-based parent company of Google, dominates the search engine market and has integrated AI deeply into its operations without depending on external providers.

    This AI player has been under pressure for a while but we still see potential. Recent reports suggest that the European Union is preparing to charge Google under the Digital Markets Act. The potential charges could result in significant fines, potentially as high as 10% of the company’s global annual revenue, and may force changes to its business model. One of the primary concerns is how Google prioritizes product results from competitors within its search services. There’s also pressure to sell Chrome due to competition.

    Alphabet’s stock presents an appealing opportunity for investors. With a forward price-to-earnings (P/E) ratio of 17.4, significantly below its five-year average of 23.6, the stock seems undervalued.

    DA Davidson recently gave Alphabet a Neutral rating with a $170 price target, noting that while the company’s core search business faces hurdles, opportunities lie in other areas of its vast portfolio, though Alphabet may need to be more aggressive in pursuing them.

    Alphabet’s AI capabilities are another key asset. The company has integrated AI into its products, including the AI chatbot Gemini (formerly Bard). Its 2014 acquisition of DeepMind highlights Alphabet's long-standing dedication to AI research and application.

  • Apple: Apple, a leading consumer electronics company, is another AI name that has been under pressure and controversy. It’s losing business in China. Despite the expected launch of the new iPhone SE 4, iPhone shipments in the country are expected to fall 6% YOY for the first half of 2025, he wrote. On the other hand, the latest iPhone has failed to impress critics.

    But, we cannot ignore the world’s second largest company and its AI ambitions. The new iPhone features Apple Intelligence, a suite of AI-powered tools heavily promoted by the tech giant, with some new features. Plus, the latest laptops and other devices also contain AI tools.

    Morgan Stanley recently reaffirmed its Overweight rating on Apple stock, setting a price target of $273. In a note to investors, the firm acknowledged that lead times for the iPhone 16 were improving but still lagging compared to last year. However, the analysts stressed that using early lead times as a gauge for demand is not highly predictive. Instead, they noted that the trend over the next 10 days would provide better insight.

2. Investing in Pure AI Companies

For a more direct exposure to AI, you can invest in companies that focus primarily on AI technologies. These "pure play" AI stocks can offer higher potential returns, but they come with more risk due to their narrower business focus.

Some Top Names to Consider

  • C3.ai (AI): C3.ai, Inc. is an enterprise AI software company that operates across North America, Europe, the Middle East, Africa, the Asia-Pacific, and globally. The company's stock experienced a significant drop after releasing its first fiscal quarter earnings and guidance, which failed to meet investor expectations. Despite this, CEO Thomas Siebel reassured investors by emphasizing the company's strong start to the fiscal year, driven by increasing demand for enterprise AI. He noted that this marked the sixth consecutive quarter of accelerating revenue growth and reaffirmed C3.ai's position as the original enterprise AI company, dedicated to solving the most complex business challenges.

  • SoundHound AI: SoundHound AI is a company specializing in voice-based artificial intelligence solutions, including a voice assistant tailored for the restaurant industry. This tool allows customers to place orders, inquire about hours of operation, and make reservations seamlessly. Beyond food services, SoundHound AI has also developed products for the automotive and hospitality sectors, boasting an impressive roster of clients such as Hyundai, Pandora, Krispy Kreme, White Castle, Toast, and Square.

    Over the past two years, SoundHound AI has experienced substantial growth, nearly doubling its annual revenue from $31.1 million to $55.5 million. During the same period, its order backlog surged from $332 million to $682 million, demonstrating strong demand for its AI products. CEO Keyvan Mohajer has laid out a clear strategy for future expansion, focusing on the company’s two core business pillars while preparing to introduce a third.

    One notable recent partnership is with auto giant Stellantis (STLA), which has integrated SoundHound AI's voice controls into new vehicles in Japan and Europe. Brands like Alfa Romeo and Citroën now feature these advanced systems, which also include ChatGPT integration via the Houndify platform. With plans for a North American rollout soon, this partnership is expected to generate significant momentum for SoundHound AI’s stock.

    SoundHound AI has also made strategic acquisitions over the past year, acquiring voice interpretation and AI analytics firms, some of which brought established clients in the restaurant industry. Despite a high price-to-sales valuation and negative earnings, SoundHound AI’s current stock price presents an opportunity for investors betting on its continued growth, backed by a strong and expanding order backlog. This growth story is just beginning, and the company’s recent moves indicate substantial potential for further success.

Investing in these companies requires keeping up-to-date with industry trends, regulatory changes, and technological advancements. While these companies show great potential, many are still in growth phases and are not yet profitable.

3. Targeting Companies Using AI for Innovation

If you're interested in AI but want to avoid technology stocks, consider investing in companies outside the tech industry that use AI to innovate.

Some Top Names to Consider

  • Pfizer (PFE): The pharmaceutical giant uses AI to accelerate drug discovery, having employed machine learning to fast-track the development of its COVID-19 treatment PAXLOVID. For example, Moderna uses AI to produce mRNAs for researchers to work with, so they no longer have to create mRNA manually to run experiments. And last year, it signed a deal with International Business Machines to use its AI and quantum computing tools to advance the biotech's research. CEO StĂ©phane Bancel has spoken often about his commitment to this technology and even set up an AI academy to educate employees about ways to integrate it into their jobs on a daily basis. But the latest AI announcement could be its biggest yet. A few months ago, Moderna said it has expanded its collaboration with OpenAI, and their work together is bearing fruit. The stock has suffered in recent weeks but analysts think it is preparing to go higher again.

  • Deere & Co: Deere & Co., a company known for its agricultural machinery and equipment, may seem like an unconventional choice among AI stocks to consider for 2024. However, numerous analysts believe that Deere's investments in artificial intelligence will yield significant benefits in the near future. For instance, the company is leveraging AI to create autonomous tractors capable of distinguishing between weeds and crops, as well as assessing plant quality.

    One of Deere's innovative products, See & Spray, employs machine learning and visual analysis to scan an impressive 2,200 square feet per second, optimizing the application of herbicides. Earlier this month, Deere released its Q1 earnings report, revealing an adjusted earnings per share (EPS) of $8.53, surpassing expectations by $0.61. Although revenue dropped by 12.4% year-over-year to $15.24 billion, it still exceeded projections by $1.92 billion. Over the past year, Deere's stock has increased approximately 7%, and with a price-to-earnings (P/E) ratio of 11.29, it appears to be undervalued within the agricultural sector.

4. Investing in AI-Focused Funds

For those who prefer a more diversified approach, AI-focused exchange-traded funds (ETFs) offer an alternative. These funds invest in a collection of AI-related stocks, providing exposure to the broader AI sector.

Some Top Names to Consider

Roundhill Generative AI & Technology ETF (CHAT): The Roundhill Generative AI & Technology ETF, known as CHAT, represents a compelling investment opportunity centered around generative AI, which we believe is one of the most significant technological advancements in recent years. Unlike other AI-focused ETFs that may prioritize companies using AI for industrial automation, CHAT specifically targets major tech firms leading the charge in developing generative AI applications. This ETF employs a unique methodology that incorporates both a transcript score and a sector score to assess the relevance of companies in relation to generative AI. Factors such as revenue, profit, and research and development investment in AI technologies are all considered during the scoring process. The ETF charges an expense ratio of 0.75%.

Invesco AI and Next Gen Software ETF (IGPT): The Invesco AI and Next Gen Software ETF, or IGPT, presents a strategic approach to investing in AI. We foresee that the AI trend will expand to include a wider range of market segments due to ongoing technological advancements and a stable interest rate environment. IGPT offers exposure to the global market with a focus on companies generating revenue from various software and AI applications, such as data storage, robotics, and autonomous vehicles. This ETF has an expense ratio of 0.6% and tracks the STOXX World AC NexGen Software Development Index, which targets 100 companies worldwide. Notable holdings include major players like Meta Platforms Inc., Alphabet Inc., and Nvidia.

Global X Artificial Intelligence & Technology ETF (AIQ): With around $2.1 billion in assets under management, the Global X Artificial Intelligence & Technology ETF, known as AIQ, stands out as one of the more popular options available in the AI ETF space. Its benchmark, the Indxx Artificial Intelligence & Big Data Index, consists of a concentrated portfolio of 84 global holdings that lean heavily towards growth stocks within the technology sector. AIQ charges an expense ratio of 0.68% and offers a low, tax-efficient 0.2% 30-day SEC yield. The ETF provides comprehensive exposure to the entire AI value chain, which often resembles the Nasdaq-100 but has a greater focus on technology and mid-cap growth. Some of the top holdings include ServiceNow Inc., Alibaba Group Holding Ltd., Netflix Inc., Cisco Systems Inc., Meta Platforms, and Adobe Inc.

While ETFs offer diversified exposure, it’s important to research the underlying companies to ensure the fund aligns with your investment goals.

Conclusion: A Balanced Approach to AI Investments

AI is a dynamic and evolving sector, making it both exciting and risky for investors. Whether you choose to invest in established tech companies, pure AI stocks, innovative non-tech companies, or AI-focused funds, it’s important to diversify your portfolio and conduct thorough research. As AI continues to develop, a thoughtful, risk-conscious approach will help you navigate the opportunities and challenges in this rapidly advancing market.

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