How to Invest in AI Stocks in 2020
With 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 few exceptions. A few years ago when we hit peak AI hype, suddenly companies were coming out of the woodwork claiming to be “using AI” after which their share prices surged. Thankfully that’s over, and now none of the pundits can agree on what’s actually a pure-play AI stock. Plenty will suggest investing in Google or Amazon, but these companies simply use AI to better answer your search query or to recommend a product you might buy. Today, we want to introduce you to some actual AI stocks.
The Early Days of Artificial Intelligence
We started covering AI topics around 2015 because we recognized it would be one of the definitive disruptive technologies of our time. When we started looking for investment opportunities, we discovered that “You Couldn’t Invest in Artificial Intelligence Yet” With the exception of perhaps NVIIDA, there were no pure-play stocks or ETFs for investing in artificial intelligence. Nobody seemed to be saying that though.
The hype cycle was just beginning back then, and people wanted to invest in AI stocks. 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. From 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
While that guidance was spot on, nothing in the 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 just two short years later, 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.”
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 that 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. Here are all the stocks mentioned in the above articles:
|Forbes||Motley Fool||CNBC||CNNMoney||The Street||InvestorPlace|
Let’s touch on some of these.
We’re not surprised to see tech giant 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 pays the bills at this time, though cloud computing is also an emerging area of growth.
Then there’s Amazon which uses AI extensively but you’re largely investing in an e-commerce platform. 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 having had horrible experiences with the company at the B2B level, 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. Investing 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 seems to be NVIDIA which sells GPU hardware, a “picks-and-shovels” play on AI. The company certainly played into the AI hype back in 2017, splashing the lingo all over its homepage at the time:
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 deserve 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).
So, is NVIDIA the best AI stock to buy?
The Best AI Stocks
“The best AI stock” is a popular search term because many newbie investors are trying to find “the next Microsoft” or “the next Tesla” or whatever tech stock is is they missed out on. That’s your first mistake, trying to think that you’ll put all your eggs in one basket and buy what someone else thinks is the top AI stock.
The best AI stocks are the ones that give you pure-play exposure to the exponential growth of artificial intelligence. These are stocks that you accumulate and hold with a long time horizon because nobody gets rich through stock trading. Investing in AI stocks means you shouldn’t just pick one single stock, but spread your bets across multiple AI applications and industries.
Sometimes the beneficiaries of AI may not be so obvious. For example, one emerging application for AI is that of the autonomous vehicle, a $7 TRILLION industry that some think Tesla is closest to dominating. There are multiple companies that will stand to benefit when a trillion-dollar industry emerges. Tomorrows autonomous vehicles will be produced by industrial robotics solutions that also use AI algorithms. Consequently, an investment in industrial robots is just another way a way to invest in the growth of AI.
Let’s also not forget about looking outside of America to places like China where they’re not afraid to use a controversial AI technology like facial recognition, and are now the global leader in this space.
AI is the New Oil
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. 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 a long overdue market crash given the strange effects of the pandemic on the stock market with Nasdaq making new highs every other day. 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?
Then you have companies that will be disrupted by AI, something that presents some interesting short trades for more sophisticated retail investors. This is likely the domain of hedge funds who will unearth these opportunities using – you guessed it – some slick deep learning algorithms. The world’s best traders use powerful neural networks to identify alpha without even being told how. Beware of companies out there claiming to offer you some AI-powered stock trading program. There is no alpha to generate at the retail investor’s level.
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).
The pump and dump problem isn’t solely restricted to penny stocks. 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.
One reason that it’s difficult to find out which stocks are AI stocks is because there is no industry classification for artificial intelligence.
Which Industry is Artificial Intelligence?
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.
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
When looking at any investment theme, we first start by seeing if their are any ETFs built for said theme. Oftentimes you’ll find ETFs, but they’ll be a hodge-podge of random tech companies as opposed to a portfolio of pure-play stocks. For artificial intelligence investors, there are ETFs that are built using AI (not impressed so far, but the work Blackrock is doing with using AI for industry classifications is notable). If an ETF wants to use AI for stock selection, they’re not likely to generate any alpha because hedge funds already have this wrapped up. As for ETFs that contain a portfolio of pure-play AI stocks, we haven’t seen any yet.
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. For example, venture capital firms are pouring money into robotics process automation (RPA). While most these exciting startups are off limits for your average retail investor, there are a few pure-play RPA stocks out there. Across the pond we have Blue Prism (PRSM:LN). Since their IPO, shares of PRSM have risen over +1,000% giving the company a present day market cap of around $1.26 billion. In ‘Murica we have a $7 billion company called Pegasystems (PEGA) which dabbles in digital process automation.
Every year we continue to unearth new investment opportunities relating to the AI theme. One recent example is Synopsys (SNPS), a company that stands to benefit from the growth in AI chips, regardless of which company ends up building the next best AI chip. Then there’s Splunk, a self-described “data-to-everything” platform that processes something called “machine data” which is basically the data exhaust that happens as a result of running loads of enterprise apps in an organization.
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.
12 AI Stocks to Invest In
After growing weary of what the pundits have to say about AI stocks, we took matters into our own hands. Many sleepless nights of research later, we produced our first two reports covering 12 AI stocks in the areas of healthcare and computer vision. We introduce each of these two reports at the below links:
Once you’ve read the above two pieces, you’ll definitely want to see what our reports have to say.
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
Sign up for our economically-priced Nanalyze Premium annual subscription and receive immediate access to both our reports along with premium articles and a bonus report on our dividend growth investing strategy, Quantigence.
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