Artificial Intelligence (AI) stocks have grabbed headlines in 2024 as well as being trendy investments. Ironically, many people may be investing in AI more than they know. If you own a large capitalization fund, like an S&P500 fund or a fund focused on technology, chances are you have a large allocation to AI already.
As of July, the top five companies in the S&P500 are Microsoft, Apple, Nvidia, Amazon and Alphabet (Google). Those companies make up about 20% of the entire S&P500 and all have AI platforms or investments. The most well-known applications or partnerships include Co-pilot and ChatGPT (Microsoft), Siri (Apple), Alexa (Amazon), and Gemini (Google) among others. Nvidia creates and sells hardware that is been integral to AI. Further down the list of the S&P500 are more companies either looking to invest in AI or ones that already are, like Tesla and Facebook (Meta), and there are plenty of smaller companies making their own bets on being the next up and coming AI investment play.
Globally, investments into AI are set to reach several trillion dollars in the near future. For perspective, the US National debt is about $35 trillion. Many investment funds (ETFs and mutual funds) use some version of a capitalization-based allocation method for their investments. In short, the bigger the company is (current share price x shares outstanding), the larger the percentage that is invested in that company. If the above companies were to get bigger, the investment in those companies would also become bigger, and so would the AI exposure in the fund or index. Now some of these companies have other business revenue streams so the investment risk is diversified into the other products or services they provide. However, if the investment into AI is going to be in the trillions for the foreseeable future, the headlines touting excitement over AI and the investment trends may continue.
AI may be evolving a bit like the dot-com era. During the dot-com era many companies had web pages and were projected to have revenue growth directly through the Internet or indirectly through information, branding, and marketing. Behind the scenes, many of the dot-coms were simply great-looking web page ideas without much of a physical business to generate product or service revenue. Now history may not repeat but it can rhyme, so we want to look at AI with a similar skeptical view. There have been great investment returns from some AI stocks, but if we listen to history there are going to be some AI companies that sound great but may end up looking like a mirage. As with any investing strategy, prudence and due diligence are important. Companies that are aggressively investing in AI to maintain a competitive balance as well as hoping to jump ahead of the pack may or may not realize the future revenue and profits that will eventually be needed to justify those investments. Therefore, many individuals may want to limit their future investments in AI to maintain a diversified portfolio allocation.
Lastly, there is no way to know what the results of this AI trend will be. It certainly has a lot of promise, and the idea of advanced AI that can solve complex disease treatments, improve diagnostics in medicine and robotics, or enhance service and product models are all very intriguing. We do not know the full impact of these investments, but we are seeing some interesting side effects. We are learning that running these complex AI programs uses a massive amount of energy, so much so that some models see the growth of AI as a strain on our power grids. We're also seeing increased heat from huge facilities that need to run these AI programs. So, the balance of how to use AI and the benefits we will see is only known in the future. Be prudent in any investing trends that advance so quickly. Every now and then we come into an era of innovation, like with AI, ideas run wild, and the real application and investment returns can often be humbling. The future is unknown and balancing how you invest in new ideas should be done with a skeptical eye.