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US tech firm Nvidia, which makes advanced chips needed to train and run artificial intelligence (AI) networks, recently upgraded its revenue outlook by 50 per cent, sending its share price soaring.
The share prices of other US-listed companies, such as semiconductor maker Advanced Micro Devices and AI company C3.ai, have also shot up as investors hunt the next big thing in the booming AI space.
Artificial intelligence has hit the headlines with investors likely weighing up the pros and cons of investing in AI companiesCredit: AP
However, while there can be big rewards for investors investing in tech stocks, there are also big risks warns Matt Wacher, the chief investment officer at Morningstar Asia Pacific.
“With AI, we are in the ‘gold rush’ stage, with investors jumping on board … it’s very hard to discern who is going to win, particularly when some companies have such lofty valuations; it’s fraught with danger,” he says.
Nevertheless, AI is looming larger in the minds of investors with the publicity surrounding advances in chatbots – particularly the launch of ChatGPT last year – and other breakthroughs, such as a paralysed man who can walk naturally again with brain and spine implants that use machine-learning.
A report by Grand View Research estimates the size of the global AI market to be $US136.55 billion ($207 billion) in 2022 and is forecasting that to expand at an average compound annual growth rate of 37.3 per cent from 2023 to 2030.
“The continuous research and innovation directed by tech giants are driving the adoption of advanced technologies in industry verticals, such as automotive, healthcare, retail, finance, and manufacturing,” the report says.
For some investors, investments in companies in the AI sector may look like a one-way bet, but tech has seen some spectacular falls from grace, one of the biggest of which was the “tech wreck” of early 2000.
Though the potential of the internet seen by investors in the 1990s eventually bore fruit, the sector become over-hyped with the share prices of some companies in the sector pushed into the stratosphere.
The market can punish individual companies when they fail to live up to expectations.
Cameron Gleeson, senior investment strategist at exchange-traded funds provider Betashares, says investors only need to recall how Alphabet [owner of Google] was punished by the market when Google’s Bard chatbot underperformed on its first demonstration.
The chatbot gave a wrong answer in a promotional video to a concrete fact, with $US100 billion initially wiped from the value of Alphabet; though its share price has more than recovered.
Because of the stock-specific risks, investors may want to look to a well-constructed basket of stocks to help reduce concentrated bets on specific AI names, Gleeson says.
There are several exchange-traded funds (ETFs) listed on the Australian Securities Exchange that track an index of technology stocks, helping to spread the investment risk that comes from holding a couple of tech stocks directly.
Units in ETFs and bought and sold just like with shares in listed companies, with returns that match the index, minus a management fee and brokerage costs.
Morningstar’s Wacher says: “Big companies, like Microsoft, that have the resources and balance sheets… could win in AI, with lower risks for investors.”
He says those who want to invest in AI would likely want to have only a small portion of their investment portfolio exposed to it, as with any higher-risk sector.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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