Investing in AI Stocks: A Beginner’s Guide

Investors are frantically researching AI investments, and financial professionals are advising on which AI stocks to buy, as interest in the topic explodes.

As the world awakens to the disruptive potential of AI, many people believe we are now at a major inflection point in history. AI adoption is accelerating, threatening to transform life as we know it. But does AI really hold that much power? Indeed, it certainly seems to, as the arrival of generative AI and advanced chatbots highlights.

But generative AI is only the tip of the iceberg. AI is infiltrating many industries, from financial services to healthcare, and artificial intelligence stocks present one way to cash in on this trend.

An Economic Critical Juncture

AI is an area that investors should take a closer look at because its widespread adoption is transformational. Indeed, a 2017 PwC report suggests AI is expected to add $15.7tn to the global economy by 2030¹.

Meanwhile, asset manager ARK Invest believes AI training cost reductions are rapidly reducing at around 70% annually. For instance, the cost to train a large language model to attain a GPT-3-level performance fell from $4.6m in 2020 to $450k in 2022. ARK believes this rate of cost reduction will continue through 2030.

As an investor, you can look at pure-play AI stocks or companies investing in AI to boost their potential and gain a competitive edge. The early adopters may achieve a first-mover advantage, but investment in any nascent industry carries additional risk.

Nevertheless, there's no doubt that AI is here to stay, and early investors could reap significant rewards.

AI should increase the productivity of knowledge workers more than 4-fold by 2030. At 100% adoption, AI could increase global labor productivity ~$200 trillion, dwarfing the ~$32 trillion in total knowledge worker salaries.

– from ARK's Big Ideas 2023².

What is AI?

Artificial intelligence (AI) is when computer systems carry out tasks that would traditionally have required a degree of human intelligence—for instance, decision-making based on speech and data recognition or natural language processing. AI is not new, but innovation in machine learning algorithms and advanced tech means it's rapidly being adopted.

Some examples of AI are virtual assistants such as Amazon's Alexa and Samsung's Bixby, self-driving cars, banking app reminders, and personalized recommendations on streaming platforms.

Meanwhile, generative AI models are springing up and being embraced by content creators. They can be used to produce high-quality images, code, text, audio, and video. Progress has been rapid, with many individuals and businesses adopting the tools to increase productivity.

AI is already revolutionizing industries, including healthcare, finance, entertainment, and manufacturing. It offers many cost-saving benefits while driving innovation and unlocking potential. Therefore, people are excited about the potential for AI to enhance our lives by making life easier, improving efficiency and boosting productivity.

However, there are also risks and challenges we should be aware of. That's because a shift change as big as the one AI is expected to bring will likely include job losses and industry disruption that's as yet unclear.

Fields of AI

AI is an overarching title covering many sectors and processes.

Subdivisions of AI include Machine Learning, Natural Language Processing, Computer Vision, Robotics, Expert Systems, Reinforcement Learning, and Deep Learning. 

Then in the field of AI R&D, we have Knowledge Representation, Reasoning, Planning, and Cognitive Computing.

We also have multiple algorithms within these areas, including Supervised and Unsupervised Learning, Evolutionary Algorithms, Fuzzy Logic, Decisions Trees, Neural Networks, Bayesian Networks and many more.

AI Market Opportunities

Agriculture: AI is being used in agriculture for soil management, disease detection in crops, and ultimately to boost crop yields.

Education: AI is transforming education. Apps like Duolingo (NASDAQ: DUOL) use AI to help users learn languages efficiently, and many more apps operate similarly to optimize personal learning. Enhanced personalization significantly improves pupil engagement, and admin tasks like continuous feedback and scoring are automated.

Energy: AI can be used to optimize energy distribution, monitor power grids, and improve the efficiency of renewable energy systems.

Finance: AI is being used to help financial institutions automate internal processes such as fraud detection, credit scoring, and efficient customer service. Financial and economic data is also increasingly used to offer data-driven financial services.

Healthcare: Big pharma and many small healthcare companies already use AI to improve patient care and operational efficiency. Indeed, AI is changing the healthcare industry by improving diagnostic accuracy, identifying diseases early, and assisting in drug discovery and development. 

AI is being used to deliver the first high-quality, whole long-read genome for less than $1,000 in 2023. This has the potential to revolutionize the field of genomics, making it more accessible and affordable to a far wider group. It means we should see more breakthroughs in disease diagnosis and treatment.

Manufacturing: AI can be used in manufacturing to optimize supply chain management, predict when equipment needs to be upgraded, cleaned or repaired, and monitor the quality of goods being produced. 

Retail: AI can personalize customer experiences, optimize pricing strategies, and improve inventory management.

Transportation: AI is helping power autonomous vehicles, traffic management systems, and in the predictive maintenance of transportation infrastructure.

Recognizing Artificial Intelligence (AI) Stocks

Naturally, investors are looking to make money on the rise of AI, a hot topic on Wall Street. Now many are bullish on the best AI stocks because of the potential for growth in the AI industry.

But as AI is infiltrating so many markets, knowing where to begin investing your cash or which AI stocks to watch can be daunting.

Erring on the side of caution, Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL) are likely to jump out as the best AI stocks considered safe, long-term investments. Indeed, these companies have access to money and resources far beyond most listed companies.

But without a crystal ball, there are no guarantees that these big tech giants will provide an outsized return on investment. For instance, some believe the power of AI poses a massive threat to the future of Google search, from which it generates vast sums of money.

AI stocks refer to publicly listed companies involved in developing, implementing or applying artificial intelligence technology. Therefore, looking deeper, there are multiple opportunities to invest in AI stocks. This includes those that manufacture the hardware and software required by AI, companies that use AI to enhance their offerings, or companies that provide AI solutions to businesses or consumers.

Investing in the best AI stocks today can provide shareholders with potential growth and returns in the long run.

Companies Involved in AI

Today, many companies are involved in AI through infrastructure, including cloud computing and hardware, analytics and machine intelligence, industry and enterprise applications, open source, data resources, and APIs.

Semiconductors and Tech Hardware

Semiconductor companies involved in AI and tech hardware include Intel (NASDAQ: INTC), Micron Technology (NASDAQ: MU), and Nvidia (NASDAQ: NVDA).

Cloud Storage Companies involved in AI

Analytics and Machine Intelligence

• Palantir Technologies Inc (NYSE: PLTR)

• Datadog Inc (NASDAQ: DDOG)

• Alteryx Inc (NYSE: AYX)

• Splunk Inc (NASDAQ: SPLK)

• Teradata Corporation (NYSE: TDC)

• MicroStrategy Incorporated (NASDAQ: MSTR)

• Qlik Technologies Inc (NASDAQ: QLIK)

• Rapid7 Inc (NASDAQ: RPD)

• Salesforce.com Inc (NYSE: CRM)

• Pegasystems Inc (NASDAQ: PEGA)

Industry and Enterprise Applications

• IBM (NYSE: IBM)

• Alphabet Inc (NASDAQ: GOOGL)

• Microsoft Corporation (NASDAQ: MSFT)

• NVIDIA Corporation (NASDAQ: NVDA)

• Intel Corporation (NASDAQ: INTC)

• Salesforce.com Inc (NYSE: CRM)

• SAP SE (NYSE: SAP)

• Oracle Corporation (NYSE: ORCL)

• Twilio Inc (NYSE: TWLO)

• UiPath Inc (NYSE: PATH)

• Palantir Technologies Inc (NYSE: PLTR)

• C3.ai Inc (NYSE: AI)

• Amazon.com Inc (NASDAQ: AMZN)

• Baidu Inc (NASDAQ: BIDU)

• Alibaba Group Holding Limited (NYSE: BABA)

• Veritone (NASDAQ: VERI)

Open Source

• IBM (NYSE: IBM) 

• NVIDIA Corporation (NASDAQ: NVDA) 

• Intel Corp (NASDAQ: INTC) 

• Microsoft Corp (NASDAQ: MSFT) 

Data Resources

The big players already mentioned, such as Alphabet, Microsoft, and IBM, are involved in gathering data resources. Meanwhile, Palantir, Datadog (NASDAQ: DDOG), Booz Allen Hamilton (NYSE: BAH), and Splunk (NASDAQ: SPLK) are also involved with big data.

Data Sources and APIs.

• Twilio (NYSE: TWLO)

• Alteryx (AYX)

• MongoDB (MDB)

• Snowflake Inc (SNOW)

• Splunk Inc (NASDAQ: SPLK)

• Rapid7 Inc (NASDAQ: RPD)

• Quandl, owned by Nasdaq Inc (NASDAQ: NDAQ)

AI Stocks Serving Specific Industries

As you’ll have noticed, certain names crop up repeatedly as they’re heavily involved across a spectrum of AI subdivisions.

It's worth noting that not all these companies are solely focused on AI, and some of them have other core business areas.

How to Evaluate AI Stocks

To evaluate AI stocks, investors should begin by looking at the financial resources available. 

The best place to start is the latest income statement, balance sheet, and cash flow statement. From here, you can look at financial metrics such as price-to-earnings ratio, price-to-sales ratio, and earnings per share. 

It may also be worth checking out the company management team and close competitors. To build a stronger picture of how the business is run and if it has a competitive edge, you should read earnings call transcripts and look for signs of a strong IP.

AI ETFs

Exchange-traded Funds (ETFs) offer an alternative to owning individual AI stocks. This can give you exposure to the AI sector but reduce any risk associated with investing in single businesses.

Here are four popular AI-themed ETFs:

• Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ)

• ROBO Global Robotics and Automation Index ETF (NYSEARCA: ROBO)

• iShares Robotics and Artificial Intelligence ETF (NYSEARCA: IRBO)

• First Trust Nasdaq Artificial Intelligence ETF (NASDAQ: ROBT)

Summing up the Potential of AI Stocks

In short, there are a multitude of AI stocks available to invest in and many ways you can become an investor in AI. With the rising demand for AI technology, we expect the best AI stocks to continue performing well. 

Despite many years of work in AI and some consolidation across the industry, it is only recently that the disruptive power of AI has started to get noticed. Really, the artificial intelligence industry is just getting started, and investing in the best AI stocks will make some investors very wealthy.

There's no doubt AI is here to stay, and as the surge of interest in generative AI has shown, it has huge potential to shape the business world.

However, if AI's disruptive capabilities come to fruition, we can expect big changes throughout the investing landscape. This makes the outlook for individual stocks, even the biggest players, uncertain. So, it pays to carry out due diligence and build confidence in your stock picks before investing large sums. 

Article Citations

1. https://www.pwc.com/gx/en/issues/analytics/assets/pwc-ai-analysis-sizing-the-prize-report.pdf

2. https://ark-invest.com/big-ideas-2023/