Fisher Investments Reviews How to Put Artificial Intelligence Hype into Perspective

While some believe AI represents an investment goldmine, others believe it is overhyped and may be approaching ‘bubble’ (overvalued) status. We believe the truth likely lies somewhere in between. In this article, we take a closer look at AI, explore ways investors can gain exposure to it and review the potential risks of relying on it to drive investment decisions.

A Closer Look at AI and Investor Enthusiasm

Broadly speaking, AI is software designed to perform tasks that typically require human critical thought, like visual perception, speech recognition, decision-making and language translation among many other potential applications.

In recent decades, different institutions across academia, the private sector and government have developed AI technologies to save time and money executing tasks of varying difficulty. For example, many are familiar with customer service chatbots or targeted advertisements as common applications of AI. However, like all developing technology, more use cases emerge every day. From advances in healthcare to agriculture, the potential of AI is enormous and has investors excited.

To capitalize on investor enthusiasm, companies have been quick to showcase their exposure to AI. Some seek to advertise their own AI-related products and services. Others describe how AI will drive efficiency gains and increase profitability. As Exhibit 1 shows, AI is generating more and more discussion in the corporate world. Since the beginning of 2023, there has been a dramatic increase in the frequency of major US companies discussing AI on quarterly earnings calls with investors and industry analysts. However, the societal impacts of AI will likely unfold over many years, and not all companies will benefit equally.

Exhibit 1: AI Chatter is on the Rise

Source: FactSet, as of 7/5/2024. Number of S&P 500 constituents citing “AI” on earnings calls, Q2 2013 – Q1 2024.

How to Approach Investing in AI Today

With AI such a hotly-discussed topic, many investors naturally wonder how they can gain exposure to AI in their investment portfolios. However, it’s important to understand the near- to medium-term impacts and properly assess the risks and opportunities.

Notably, there are relatively few “pure play”, publicly traded AI companies. Most are small, unprofitable, privately-held firms, often backed by large, well-capitalized investors who can afford to sustain significant losses in hopes of “hitting a homerun”—too risky for most individual investors, in our view. With stiff competition, many of these small, pure play AI companies are unlikely to succeed. The ones that do are likely to become acquisition targets for larger companies with more established business lines. The failure for start-ups to survive is not specific to Tech. For example, the number of active automobile manufacturers dropped from 253 in 1908 to only 44 in 1929, with about 80 percent of the industry’s output accounted for by Ford, General Motors, and Chrysler.

In the public realm, most AI-related investments can be found in Technology and what we call “Tech-like” companies in parts of Communications Services, Consumer Discretionary and Industrials. It’s helpful to categorize the public AI investment universe into a few broad categories based on their role within the AI value chain: semiconductors and hardware, cloud infrastructure and software.

Note: Companies mentioned below are for informational purposes only and do not represent investment recommendations. If you are viewing from a desktop, hover over the icons below to explore how each category supports AI. If you are viewing from a mobile device, click each icon to learn more.

Exhibit 2: Investing Realities of AI—Adding Exposure to AI Today

Not all of these categories (semiconductors and hardware, cloud infrastructure and software) will benefit equally, or at the same time. For example, some semiconductor companies have seen their sales explode as large cloud-computing providers engage in an arms race to build up their infrastructure. However, it likely takes a while for companies further down the value chain to see material revenue growth solely from AI offerings. That’s why we think it’s likely more appropriate to invest in AI as part of a broader, globally diversified portfolio for most investors.

Using AI as an Investing Tool

As AI technologies become more prevalent, investors are also exploring how to integrate AI into their portfolios. AI can provide greater efficiencies by quickly analyzing extensive data sets, aiding market research, offering quicker trade executions and performing basic service tasks. Others are looking to use AI as a tool to efficiently choose stocks and build portfolios.

Like AI itself, this concept is not new—AI-powered funds have been available for years. However, AI-run portfolios are only as effective as the inputs they are fed and typically rely exclusively on historical data. While AI can enhance efficiencies and support market research and trade executions, we think AI serves best as a complement to decision-making (rather than a tool to be exclusively relied upon to make decisions.)

In our view, AI is certainly a promising technology that has provided tailwinds to parts of the market. However, we believe a disciplined approach to investing within AI-related sectors and companies is likely the prudent choice for most investors, as the long-term winners in the AI technology race are nearly impossible to know today.

Want to Dig Deeper?

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher discusses the ways artificial intelligence (AI) could benefit society, how technology has historically affected job markets and the risks associated with AI adoption in a recent video.

For our thoughts on recent AI-fueled excitement regarding the traditionally defensive Utilities sector, you can read Fisher Investments’ MarketMinder article, “Checking Back in on Utilities’ Rally.”

For more on AI, and for a closer look at a pertinent risk of AI—scams—and how AI itself may offer a solution, you can read Fisher Investments’ MarketMinder article, “Patience, Skepticism and Caution: Three Timeless Tools to Counter AI Hype and Scams.”

For more market insights from Fisher Investments, read our latest articles.