How to Invest in AI Stocks in 2020
In the last five years, Nanalyze has unearthed opportunities for retail investors to receive exposure to the exciting field of artificial intelligence (AI). While there are more than 3,600 startups around the globe focused on commercializing various aspects of AI, the opportunity has largely belonged to venture capital (VC) investors, with the exception of a few areas such as pick and shovel investments in AI chips. That is, until now.
We’ve identified two areas where pure play investments are now available for retail investors. Nanalyze Premium subscribers can build an investment strategy around AI using 12 stocks that are active in computer vision and healthcare.
Now, if you’re like us, you’re not going to just give a bunch of MBAs your hard-earned money unless they show you they have the chops to produce some quality insights. That’s why we’re going to tell you how we learned to invest in AI after many years spent researching. Without further ado …
The Early Days of Artificial Intelligence
We started covering AI topics in the early days of Nanalyze in 2015 because we recognized it would be one of the definitive technologies that would disrupt every industry in the future. We started looking for investment opportunities, as documented in an article titled “You Can’t Invest in Artificial Intelligence Yet.” We discovered that while venture capital firms were spoiled for choice, there were no pure-play stocks or ETFs for investing in artificial intelligence.
The hype cycle was just beginning back then. A December 2015 piece by TechCrunch titled “Investing In Artificial Intelligence” was authored by a VC investor who majored in stem cells and regenerative medicine during his undergraduate at Oxford and had recently completed his PhD at Cambridge. The 2,366-word article contained some fascinating facts and quality guidance about investing in artificial intelligence. Take the first paragraph of the article:
Artificial intelligence is one of the most exciting and transformative opportunities of our time. From my vantage point as a venture investor at Playfair Capital, where I focus on investing and building community around AI, I see this as a great time for investors to help build companies in this space.Credit: A venture investor at Playfair Capital
However, nothing in that article talked about how your average Joe investor might invest in artificial intelligence because there weren’t really any AI companies trading on the public markets.
The AI Bubble of 2017
We thought we’d have some time before the AI bubble formed, but in just two short years, things started getting a bit out of hand. The year was 2017, and the 5 biggest artificial intelligence startups were all unicorns valued at $1 billion or more. More than 1,500 startups were selling some sort of “AI-powered” solution. According to our favorite voice of reason, Anand Sanwal, CEO at data research firm CB Insights, quipped, “it’s becoming clear that if you have a website, you are now AI.” Of course, Sanwal’s company also put out the “CB Insights AI 100” list that showed us that there was lots of potential beneath the surface. There was plenty to get excited about, but retail investors who wanted to invest in these amazing machines before one took their jobs were still locked out. That didn’t stop the pundits from pulling tech stocks out of thin air and consecrating them as “AI stocks.”
Looking to invest in AI stocks with real pure-play exposure to this exciting theme? Subscribe to Nanalyze Premium and check out our AI investing reports by clicking on the banner below. To know more about how AI as a theme developed for retail investors, read on.
Are All Tech Stocks Artificial Intelligence Stocks?
Every time an emerging technology theme starts gaining some traction, the likes of Motley Fool, Jim Cramer on CNBC, and people of his ilk, start rambling on about all the ways you can invest in the theme as retail investors. We like to call this the “investing in everything with Google“ thesis. Don’t be fooled. Here’s a sampling of what everyone was saying back then about “how to invest in artificial intelligence.”
Check out that last article title – MONSTER PROFITS! Of course we want that! Monster profits are what you use to buy mansions and fast cars with. Again we see the usual suspects. Here are all the stocks mentioned in the above articles:
|Forbes||Motley Fool||CNBC||CNNMoney||The Street||InvestorPlace|
We’re not surprised to see Google make the list. While the company’s ad revenues dominate its bottom line, it has invested heavily in artificial intelligence, beginning with the 2014 acquisition of DeepMind, a leading AI company out of the UK . Google also offers an open source AI platform called TensorFlow. We’ve held Google shares since not long after its IPO. It’s a great company that’s not afraid to “fail fast” and “innovate or die.” While AI has become a key part of its business, ad revenue still mostly pays the bills at this time.
Amazon uses AI extensively but you’re largely investing in an e-commerce platform when you buy shares of AMZN. As for IBM, a small but growing portion of its revenues come from its “cognitive solutions” division, which includes their cloud offering along with Watson . In 2016, 22.5% of IBM’s revenues came from “cognitive solutions,” a fairly meaningful number back then. By 2019, that number had edged up to almost 30%. We’ve been long on IBM for a while now, but for dividend growth reasons.
Another popular “artificial intelligence stock” is Facebook. We have a personal dislike of Facebook, both as a product and a company, and hope that with no barriers to entry, someone else eats their lunch. CEO Mark Zuckerberg is investing in AI, but it seems like he and his company are the beneficiaries. The same thing seems to hold true for Microsoft and Salesforce, two more companies the pundits like to tout as AI stocks.
The last two stocks on the list, Mobileye and Tesla, are plays on autonomous vehicles, which are heavily dependent on AI. Mobileye was acquired by Intel a while back.nvesting in Tesla is largely a play on some very fancy electric vehicles, though with Elon Musk in charge, you never know what direction the company will take.
The only real AI stock in the bunch is Nvidia, with its GPU hardware, which represents a “picks-and-shovels” play on AI. The company certainly played to the AI hype back in 2017, splashing the lingo all over its homepage at the time:
Amazon may be using AI, but let’s face it. You’re largely investing in an eCommerce platform when you buy shares of AMZN (one where most their profits actually come from Amazon Web Services). As for IBM, a small but growing portion of their revenues come from their “cognitive solutions” division which is mainly Watson (deep learning). In 2016, 22.5% of IBM’s revenues came from “cognitive solutions,” a fairly meaningful number back then. By 2019, that number had edged up to almost 30%. We’ve been long IBM for a while now, but for dividend growth reasons.
Another popular “artificial intelligence stock” is Facebook, a company that seems like an absolute mess based on our interactions with the firm. They’re investing in AI, but it seems like they’re more a beneficiary of AI. The same thing seems to hold true for Microsoft and Salesforce, two more companies the pundits like to tout as AI stocks.
The last two stocks on the list, Mobileye and Tesla, are plays on autonomous vehicles which are heavily dependent on AI. Mobileye was acquired by Intel a while back, and investing in Tesla is largely a play on electric vehicles, though with Elon Musk in charge, you never know what direction the company will take.
The only real AI stock in the bunch is Nvidia, with their GPUs that are a “picks-and-shovels” play on AI. The company knows it too, and back then they were largely positioning themselves as an AI company. Just look at how their homepage emphasized AI back in 2017:
Today, NVIDIA is focused more on the “explosive growth of big data” angle, and preparing to be the go-to company for chips used in data centers.
The key takeaway here is that while all these companies are working with AI, only Google (Tensorflow), IBM (Watson), and NVIDIA (GPUs) seem to be making a real effort to capitalize on AI as a service offering (with perhaps only NVIDIA having succeeded at that so far). That’s what we concluded in 2017, and it’s pretty much the same situation today. Google continues to focus on all kinds of things aside from showing ads in the right places online, but none of their moonshots have come to fruition yet. IBM continues to tread water while senior management vomits platitudes that convince Ginni Rometty they need a bigger bonus. It all leads one to believe that the only real AI stock that exists today out of the bunch is Nvidia – and you can bet all that future potential is being priced in with rich multiples. (Talking about “multiples” is something finance professionals do to make it sound like we know more about the market than you do).
Before we buy some Nvidia shares and call it a day, we also need to think about how artificial intelligence stands to benefit each industry in the broader stock market.
On the long side, every single company in the S&P500 can benefit from using artificial intelligence and automation. Industries like insurance are going to be winning early on since AI driven predictive analytics are just cleaning up. You can invest in big insurance companies like Chubb and be sure they are all over using artificial intelligence to run their business better. At least we would hope. What we’re hinting at here is that maybe an S&P500 tracker ETF might just be the safest and best way to benefit from artificial intelligence in the long run. As dividend growth investors, we expect that machine learning algorithms will create efficiencies that pave the way towards future dividend increases, something we wrote about in a piece titled “Artificial Intelligence and Dividend Growth Investing.” Intuitively, it feels that we’re on the verge of long overdue market crash, but what if we’re at the cusp of the biggest bull market the world has ever seen when AI replaces 80% of all service jobs?
On the short side, there may be lots of interesting shorts for more sophisticated retail investors. This is likely the domain of hedge funds who will unearth these opportunities using – you guessed it – some slick machine learning algorithms. Also expect to see the emergence of over-the-counter (OTC) stocks claiming to be involved in AI who will try to fleece retail investors. You’d be surprised to see how these scams actually manage to reel in some pretty sophisticated investors with deep pockets (they’re called bag-holders, using pump-and-dump vernacular). Regular readers will remember when we warned about Veritone being touted as an AI stock back in April 2017 when it traded at over $45 a share. How Much “AI” is there in the Veritone IPO? we asked, questioning whether or not Veritone was a pump-and-dump as share prices surged. As of April 2020, you could buy these same Veritone shares for less than $3 a share, a loss of -93%. Investors need to be very careful about following the herd in times of excitement or panic.
Which Industry is Artificial Intelligence?
As we’ve noted, artificial intelligence stocks are far and few between. If you believe the standard line from the talking heads, just invest in Google and you’ve invested in every emerging technology under the sun. Now you can see how silly that statement is in the context of looking at revenues. If we were to choose a picks-and-shovels AI stock like NVIDIA, we would see that they are classified under “Semiconductors,” which is what we would expect. It hardly makes sense to come up with a new global industry classification standard (GICS) category for artificial intelligence because we’re already at a point where AI is pervasive. If you’re not thinking about using AI in your business, then you’re not going to be able to compete. AI is the new electricity, the new oil, the new black, the new everything, really.
Of course, there is a pitfall when it comes to looking at where revenues come from today, versus where they may come from tomorrow. We learned this lesson when we initially dismissed the top-3 lithium producers as having non-meaningful contributions from lithium to their revenues. Fast forward a few years later and we now see very meaningful revenues from lithium for these top-3 producers. “Skate to where the puck will be” as a famous hockey player once said. (Hockey, along with rugby, are some of the last great sports played by real men who beat the isht out of each other over perceived injustices, then go for a beer afterwards.)
Since there is no industry classification for artificial intelligence, the only way you can find artificial intelligence stocks to invest in is by employing a bunch of MBAs to spend years researching companies across the globe to separate the wheat from the chaff. And that’s precisely what we’ve done here at Nanalyze.
Investing in Artificial Intelligence Stocks Today
Many of the experts will tell you that investing in artificial intelligence means going out and buying the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) all over again, but that’s the lazy approach. Over the past five years or so, we’ve been uncovering pure-play artificial intelligence stocks that are flying under the radar of most retail investors. That’s because about half of these stocks trade on foreign stock exchanges in developed markets across the globe. What all these stocks have in common is that they’re directly involved in using artificial intelligence and machine learning to create what the bright minds over at Merantix call “exponential value.” You cannot have exponential returns without creating exponential value. While Nvidia seems to be doing whatever it takes to maintain its dominant position in AI chips, there are other ways to play the AI theme. After many sleepless nights of research, we produced our first two reports covering 12 AI stocks.
7 pure-play AI Healthcare stocks
Comprehensive company profiles
Insightful analysis and financial analytics
What investors should watch for
5 pure-play Machine Vision stocks
Comprehensive company profiles
Insightful analysis and financial analytics
What investors should watch for
We also continue to unearth new investment opportunities. One such example is Synopsys, a company that stands to benefit from the growth in AI chips regardless of which company ends up building the next best AI chip. Become a premium subscriber and receive immediate access to both out reports along with premium articles and future planned reports. We’ll continue to tell you how to invest in AI.
Additional benefits of the Nanalyze Premium subscription
250 Premium articles on disruptive tech investments (and growing)
More upcoming investment reports on AI chips, gene editing, and robotics
And our magnum opus: Quantigence – A Dividend Growth Investing Strategy