Artificial Intelligence, or AI, is officially here. Supercomputers can beat humans at many cognitively demanding tasks.
Computers have out-powered humans in raw computational terms for almost as long as they have existed – however, this could only bring this power to bear on very narrow tasks that required extensive (human) programming to enable.
In this decade, neural networks and other machine learning techniques have enabled algorithms to train themselves how to perform complex tasks successfully. This has been used with great effect to allow AI to master video games, or drive real cars in busy streets with minimal human intervention.
For years, we have heard computer scientists exclaim that AI is the future. It would probably be more accurate to now say that AI is the present.
Should investors back AI tech firms?
It must logically follow that AI tech firms are sound bets, right?
Well that might not necessarily be the case.
An industry may well grow to become a dominant force in the global economy, but the quality of an investment opportunity will always hinge on whether investors can buy a stake in those future earnings at the right price.
And right now, it can’t be said that tech firms are trading at an attractive valuation level.
At the time of writing, growth stocks including AI tech firms have taken a battering in the financial markets, but such a fall must be read in the context of their meteoric rise in the years preceding. Their PE ratios still exceed industrials by multiples.
What’s more, ‘themed ETFs’ or stock collections pushed by the best UK stockbrokers are funnelling retail investor money into this concentrated group of stocks, which is pressuring prices upwards and keeping them expensive against all valuation metrics.
This is leading to the discouraging conclusion that the greatest stock gains in the AI sector have already been made by earlier investors. Those who invested in these fledgling companies ten years ago before AI became so viable and visible have seen their holding shoot up in value by 10x or even 100x in some cases.
Which tech firms are investing in AI?
The AI space is full of small start-ups, medium-sized specialists and trillion-dollar firms.
These include Nasdaq-listed tech groups like Google (known under the corporate moniker Alphabet), Apple, Facebook (now called Meta Platforms) and IBM. IBM is known for its IBM Watson supercomputer.
Tesla is also a prominent name in the AI space, as well as its misleadingly named ‘full self-driving’ feature which is included as an optional extra on its battery electric vehicles.
Elon Musk has also unveiled plans for a humanoid robot under the Tesla brand, which could possibly leverage some microprocessor hardware and the spacial recognition tech from its vehicles, although this really just at a concept stage.
Would AI future-proof a portfolio?
Whether you share the opinion that hot tech-themed stocks are over-valued or not, your equity portfolio probably has a decent holding already if you passively follow US or worldwide equity indices. That’s thanks to the large weighting in the S&P 500 index that is taken up by FAANG stocks. This (in our opinion – not financial advice), is probably enough to provide a call option on AI success without creating additional exposure to the potential downside in the medium term.