Upbeat music plays throughout.
Narrator: Hey Computer… [pause]
AI voice: Yes?
Narrator: Why did Nvidia's stock jump so quickly?
AI voice: According to my research, from January to July of 2024, Nvidia's stock nearly tripled. It's not the only company that experienced huge growth either. Artificial intelligence is a big topic among investors. It was mentioned nearly 10,000 times on earnings calls in 2023. As more products require computer chips to handle AI workloads, from automobiles to blood pressure monitors, investors are excited by the companies that produce those chips, like Nvidia.
Narrator: 10,000 times? What does that mean for the future of stocks?
AI voice: That's unclear, but what we do know is that global investment in AI technologies may reach $200 billion by 2025, according to Goldman Sachs Economic Research.
Narrator: Is this another bubble?
AI voice: I'm afraid I can't answer that. In early July 2024, after its rapid incline, Nvidia stock began to contract for several weeks, pulling back from the all-time highs. Microsoft, Advanced Micro Devices and other AI stocks also contracted over the same timeframe.
Narrator: Thanks, Computer.
Ok, so AI is making waves. Depending on your portfolio, you may wonder how you could get in on the action, but before we get to that, let's back up a little bit. Let's dissect what artificial intelligence is and what it isn't.
What artificial intelligence is the ability of a computer to perform tasks—perception, reasoning, learning, problem solving. It's more than just Siri, Alexa, or Google. The ads you get on Instagram, the shows Netflix recommends to you—those are all built on an algorithm of things you've interacted with, bought, or liked in the past. That's a form of AI. It has the potential to upend every industry in the same way the internet did in the 1990s. When the internet first became mainstream, the idea of downloading an MP3 while walking around town was unheard of.
What artificial intelligence isn't is magic. It's not infallible, and—perhaps more importantly—it's not about reproducing human intelligence. It's simply computer programming. Computers have speed and short-term memory, but their ability to connect the two with the broader world around them is still limited.
So, that's a high-level overview of what AI is. Now how could you get some exposure to that in your portfolio?
You can't mine for gold without picks and shovels, just like you can't post that picture on social media without a cellphone tower or Wi-Fi connection. The internet wouldn't function without the companies that build and run the technology.
When it comes to AI, these so-called picks and shovels are going to be the chipmakers, and designers… some of the big names you might be familiar with—Nvidia, Advanced Micro Devices, Taiwan Semiconductor. These companies make the chips that allow the complex algorithms to function… they're the processors in computers, smartphones, cars. Companies like ASML produce the equipment that makes the chips.
As AI technologies advance and become more widespread, companies will fight to put their mark on the space—like Micron and Applied Materials. Think about Google: It wasn't the first search engine created, but it's become the juggernaut. Keep in mind, advancements in technology may not turn into financial outperformance.
Another way to consider exposure to AI is by looking at established companies that have potential to leverage AI in unique ways. Think about it this way: Just because you didn't invent the first mousetrap doesn't mean you can't put together a better one.
Animation: A headline from Apple reads: Introducing Apple Intelligence, the personal intelligence system that puts powerful generative models at the core of iPhone, iPad, and Mac.
Narrator: Apple and Alphabet are considering designing and building their own AI chips to reduce their reliance on the Nvidias of the world. In June 2024, Apple announced its own "A.I.," or "Apple Intelligence," that will be able to generate custom emojis, summarize phone calls, and monitor emails to determine what emails are important.
Animation: A headline from Meta reads: Maximize performance with Meta's suite of AI-powered ad tools. A passage on Meta's claims about the benefits of AI is highlighted in the article.
Narrator: Meta platforms and Alphabet are spending big on AI in the advertising space, letting customers use new tools to create ads on the platforms. Meta claims its AI leads to a 32% increase in the return on ad spend. These types of integrations come with heavy costs and uncertain payoffs if clients don't want them, but it shows how strongly companies think artificial intelligence will play into future growth.
Animation: A headline from Cisco appears on screen with the headline: Cisco and Splunk: Driving the Next Generation of AI-Enabled Security and Observability. A passage about Cisco's acquisition of Splunk is highlighted in the article.
Narrator: Cybersecurity is a big industry that AI has the potential to change. In 2024, Cisco acquired cybersecurity firm Splunk for $28 billion, claiming the combination of the two will "help businesses move from threat detection and response to threat prediction and prevention." In short, they'll use AI to predict where cyberattacks will come from.
Animation: A headline reads Microsoft, OpenAI plan $100 billion data-center project, media report says. A passage about Amazon and Meta's AI spending is highlighted in the article.
Narrator: Think about Microsoft and Amazon—two legacy internet companies that have been around for decades… They're both investing heavily in new data centers in anticipation of new growth in cloud computing. According to Reuters, rapid adoption is leading to heightened demand for "AI data centers capable of handling more advanced tasks than traditional data centers." Amazon is spending $150 billion, and Microsoft is spending a hundred billion. Microsoft is also partnering with OpenAI as well and is expected to build an AI "supercomputer" known as Stargate.
Let's take a step back here for a second. Just because AI is a technology doesn't mean every company that has potential upside with AI is high tech. Sure, when we think of AI, it's natural to think about computers, smartphones, and cars… chips, screens, and speakers. But what goes into those devices and companies? Think beyond the obvious chipmakers and phone sellers.
It takes immense power to run AI systems. The New York Times reported AI could use the same amount of electricity as Argentina by 2027. Consider utilities and commodities that have potential to power the surge. AI growth could buoy energy stocks to new heights. In an earnings call, TC Energy chief operating officer Stanley Chapman said he expected demand for gas to jump as much as 8 billion cubic feet a day by 2030. That's roughly 20% of the current demand for natural gas in the U.S. right now.
Animation: A graph titled Data center electricity demand forecast compares the bullish and the base cases for the growth in U.S. data center electricity demand in TWh. The bullish case line rises from about 90 in 2021 to 180 at the end of 2029. The base case rises from about 90 to more than 120 in the same time frame.
Narrator: Data centers, like the ones Amazon and Microsoft are investing in, could more than double the demand for power.
Animation: A headline reads AI is exhausting the power grid. Tech firms are seeking a miracle solution. A passage about AI and energy use is highlighted in the article.
Narrator: So much that experts worry the power grid won't be able to keep up, with The Washington Post reporting some tech companies are quote "going all in on experimental clean energy projects that have long odds of success." That's how much companies expect AI to impact the power grid. They also report that a ChatGPT-powered search consumes almost 10 times the amount of electricity as a Google search.
Consider other so-called "Trojan Horse" companies, or companies that aren't necessarily in tech but can still harness the power of the AI and the internet to revolutionize their businesses. Remember when news stories were focused on Walmart taking on Amazon like some early-2010s David and Goliath? Well, they're at it again… Walmart is using AI in new ways, like letting customers shop by text message and automating its own supplier negotiations. Basically, Walmart used a chatbot to ink deals with suppliers for things like shopping carts for their stores.
Then there's always the new kid on the block. Try to consider which companies are innovating beyond what's current, like looking past self-driving cars to find companies that may be… automating traffic signaling or something like that. For every Amazon boom, there are countless Pets.com busts. Keep in mind, it can be incredibly difficult to pick a winning new company, but the needles exist if you feel like you can find them among the hay.
Animation: A headline from the U.S. Securities and Exchange Commission reads NVIDIA Announces Financial Results For Fourth Quarter and Fiscal 2024. A passage about Nvidia's quarterly filing is highlighted in the article.
Narrator: Consider searching public company reports filed with the Securities and Exchange Commission to see where innovators and major companies are investing in AI. In February 2024, Nvidia mentioned autonomous driving, medical imaging, and drug discovery in a quarterly filing.
Other companies may list the avenues they're exploring in their quarterly or annual filings; you may be able to use those as breadcrumbs to follow. Make sure you're still doing your own research on the breadcrumbs before you decide to bake your own loaf. This research should simply be a starting point for investors.
Let's pump the brakes for a second… None of this should be taken as a recommendation. It's uncharted territory, and any company can mention AI-related investments that will garner headlines. The trouble is… what's going to stick long-term?
Animation: A headline from the Washington Post reads Big Tech Says AI is booming. Wall Street is starting to see a bubble. Passages about concerns related to AI are highlighted in the article.
Narrator: Some investors worry the level of corporate investment could be the start of a bubble, and, according to the Washington Post, some Wall Street giants are worried about the sustainability of this push into AI. The Post also reports analysts expect tech companies spur only about a third of the $60 billion they spend a year developing AI models in revenue in the same timeframe. Google CEO Sundar Pichai said in a July 2024 earnings call that underinvesting has greater risk than overinvesting in AI, but still… A good reminder to keep your overall portfolio diversified.
Keep your emotions in check; think past the headlines, study business plans… . Check your gut on whether the promise seems realistic and the people promising it trustworthy. Many stock prices may have future expectations already priced in.
Animation: A headline from the Federal Trade Commission reads FTC Launches Inquiry into Generative AI Investments and Partnerships.
Narrator: On top of the company-specific risks, AI is still in the early days—like when cryptocurrency was new. AI could face regulatory hurdles; the FTC is already investigating recent partnerships between generative AI companies and cloud service providers.
AI, as an industry, is in its infancy. The companies that lead the charge now may not lead forever. As with any investing strategy, be sure to diversify your holdings. This is a fast-moving industry, and changes can come out of left field. Remember that until early 2023, Nvidia was mainly known for its video game chips, and that changed in a hurry.
It's a good idea to study a lot and be prepared to make sudden shifts in your positions.
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