2023 will be remembered as the year that artificial intelligence (AI) became ubiquitous in society’s lexicon. Companies at the forefront of the AI revolution dominated the headlines and outperformed the overall market. 36% of S&P 500 companies mentioned “AI” in their Q4 2023 earnings calls, up from 31% in Q3. Considering that companies that mentioned AI in Q4 2023 posted an average stock price increase of over 28% last year, this trend is likely to accelerate with upcoming Q1 2024 earnings releases.
For investors, the challenge in navigating the AI hype lies in separating reality from hype, but those who can think outside the box and identify overlooked areas where AI technology can be applied has potential benefits. But what exactly is AI? Can it live up to its promises and hype?
For most people, the term brings to mind science fiction movies in which computers and robots acquire some degree of sentience, reaching or exceeding human intelligence (as well as 2001's HAL and Agent Smith's The Matrix). , and may frequently turn red). In reality, AI in its current state is more like an open-ended computer program. AI mimics human learning in identifying patterns, predicting, and analyzing results, applying previous successes and failures for continuous improvement.
AI already exists, and you are already interacting with it, perhaps without realizing it. Predictive text on your smartphone (and MicrosoftMSFT Word, which completes the sentence as you type) is a type of AI. The (possibly frustrating) customer service agent you chatted with on an e-commerce website might have been an AI, and if not, it soon will be. Did you use facial recognition to unlock your phone? It was also AI. There are countless other examples, including movies suggested by NetflixNFLX (NFLX), stories and posts in your Facebook (META) feed, and traffic alerts shown in Google (GOOG) Maps.
These relatively mundane everyday use cases are often overlooked amid excitement about more futuristic promises such as self-driving cars, robotic factory workers, and neural implants that could boost human brain power. . While we are rapidly progressing toward these three examples, the next stage of AI is likely to see widespread adoption in other industries beyond traditional technology companies.
One of the most obvious and interesting applications of AI is its potential to accelerate scientific and medical research. AI has the potential to speed up drug development and testing by identifying the best compounds and predicting the effectiveness of drugs under development. AI can help catalog and draw conclusions about drug performance and side effects, potentially identifying potential side effects in advance. Pharmaceutical companies such as Pfizer PFE (PFE) have already been using AI in this capacity for about a decade.
Beyond healthcare, retailers of all types are beginning to apply AI to analyze customer behavior, process large amounts of real-time data about purchasing patterns, find optimal pricing, and manage inventory. Much to the chagrin of music and sports fans, ticketing companies like Ticketmaster (TKTM) and StubHub are implementing AI to dynamically or “surge” prices to automatically increase prices to match peak demand. Applied pricing algorithm.
As AI continues to improve and evolve, humans will no longer be needed for some jobs, and technology will allow human workers to fill more roles. Customer service, data entry, and telemarketing roles are already being replaced, and AI can also be trained to handle less complex computer programming and coding tasks. Currently, machines are responsible for 34% of business tasks, but according to a study by the World Economic Forum, that proportion is expected to increase to 43% by 2027. Thankfully, at least some of the job losses will be offset by the need for more data scientists, engineers, robotics experts, and other highly skilled roles.
As an investor, there are several ways to position your portfolio for the coming AI revolution. The simplest option would be to stick with this policy and maintain a market-cap weighted exposure to the US economy. The United States is at the forefront of her AI revolution, and as already mentioned, this technology will permeate all sectors of the economy. Successful companies have the largest increase in stock price and therefore have a greater weight in the market cap index (in the case of his Nvidia, which grew from $200 billion to more than $2.2 trillion in just 5 years) The same applies). In 2023, we saw this development. The so-called “Magnificent Seven” mega-cap stocks, all with significant exposure to AI, accounted for a disproportionate amount of the S&P 500's returns.
For investors who want to be more active, increasing allocations to Nasdaq or the S&P Technology Sector ETF (XLKXLK) are ways to increase exposure to AI. Tech companies aren't the only beneficiaries of the AI boom, but chipmakers and cloud data storage operators are essentially the lynchpins of AI, and despite their recent impressive performance, there's still plenty of room to take advantage of. Specialty AI-focused ETFs are also available, such as the Invesco AI and Next Generation Software ETF (IGPT) and the Global X Robotics and AI ETF (BOTZBOTZ).
To set up their portfolios for the “second wave” AI boom, where non-tech companies integrate and apply AI technologies to improve profit margins and accelerate growth, investors need to address capital spending. Care should be taken to identify financially healthy companies. As interest rates remain high, companies with healthy cash flows and a track record of spending on R&D will have a first-mover advantage in developing AI strategies. Screening for companies with the highest R&D to sales ratios in the large-cap universe reveals non-tech companies such as Deere (DE), Johnson & Johnson JNJ (JNJ), and Schlumberger SLB (SLB) . Expanding your search to small- and mid-cap stocks reveals companies such as medical device maker Edward Lifesciences (EW), chemical maker FMCFMC Corp. (FMC), and glass maker Corning GLW (GLW). Even the New York Times (NYT), the newspaper that sued Microsoft and OpenAI over ChatGPT's propensity to steal content, recently announced plans to hire a staff member specializing in AI. While there is no guarantee that these companies will be able to successfully integrate AI into their respective businesses, identifying companies willing to invest in R&D could be a way to find the next less obvious beneficiaries of the AI revolution. There is a possibility.
Rather than a dot-com bubble 2.0, AI looks like a revolutionary advancement that will unlock efficiency and change the way companies do business in the coming years. AI is already spreading beyond the technology sector and will become a universally necessary strategic initiative across all major industries within a few years. Investors can take advantage of the AI boom by looking beyond the obvious beneficiaries and positioning their portfolios at the top of the “second wave.”
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