by Keith Gangl, CFA
Artificial Intelligence (AI), as defined by the Oxford Dictionary, is the development of computer systems able to perform tasks that normally require human intelligence. AI technologies are in the early stages of development and there is a belief that the capabilities of AI could transform the world. Throughout history, there have been several technological advances that have transformed economies, such as steam power, electricity, automobiles and the internet. AI could potentially be the next big wave that changes the way we work and live.
As a result of this potential sea change, there are many companies currently investing in AI to enhance and improve their business operations. However, there are only a small number of public companies that investors can currently invest in to get a direct benefit of AI. Business industries currently considered AI beneficiaries include:
- Semiconductors & computing
- Cloud infrastructure
- Productivity & software applications
Since the unofficial beginning of the AI boom last year, the leader in artificial intelligence has been Nvidia (NVDA). NVDA is a semiconductor company that creates fast processing chips that help to make AI technologies possible. A competitor in semiconductors – the backbone of AI processing – is Advanced Micro Devices (AMD). As seen in the chart below, both companies have performed significantly as they are considered at the forefront of this technological revolution. From Jan. 1, 2023, to May 7, 2024, NVDA is up 525% while AMD is up 138%, both far exceeding the performance of the S&P 500 during that time.
Another area of potential benefit from AI is cloud infrastructure companies. Cloud infrastructure, also known as “hyperscalers,” enables companies to build and scale AI technology for their businesses. The major companies in this space include Amazon (AMZN), Microsoft (MSFT) and Alphabet (GOOG). As shown above, their performance has also outperformed the S&P 500 since the beginning of 2023.
The third area where investors can look to invest in the AI theme is in productivity and software applications. There are a few companies that solely benefit from AI applications, but we expect over the next few years many companies will focus entirely on artificial intelligence and how they can build a business around it. The company currently leading in this area is Microsoft (MSFT), both with their release of CoPilot, an AI assistant, and their investment in OpenAI, the creator of ChatGPT.
ChatGPT is an artificial intelligence application that generates answers to questions. ChatGPT launched in November of 2022 and within five days reached a million users.1 The speed with which it acquired a million users made it the fastest growing platform ever. The chart below reflects the speed of well-known platforms reaching a million users. ChatGPT reached a million users significantly faster than other technologies such as Facebook (10 months) and Netflix (3.5 years).
For investors, AI provides a lot of excitement as the opportunity is massive and the winners and losers are still to be fully determined (with potential new entrants to change trends entirely). The hype around AI is rampant, but we believe we are in the early innings and AI is a potential game changer. Like previous revolutionary changes, we expect there will be some potential big winners, but we also expect there will be many companies that don’t live up to the hype.
At Gradient Investments the primary portfolios that will have direct or significant exposure to companies that are AI focused are in the Core Select, Gradient 33, and Digital Discovery. Over time, however, we expect nearly all companies and industries will incorporate some form of AI, and their capabilities in leveraging the technology to add revenue or increase efficiency will be a factor in their future stock prices.