Should you invest in AI stocks?

Could AI stocks bring returns, or is this more of a passing fad?

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Artificial intelligence, or AI, has taken over the news recently with the rise of ChatGPT. And that, perhaps unsurprisingly, has created a stir on Wall Street, with some investors beginning to eye AI as an investment opportunity.

But could AI stocks really bring returns, or is this more of a passing fad? Many experts are optimistic about the potential for growth in the AI sector, while others advise proceeding with caution. Michael O'Rourke, the chief marketing strategist of Jonestrading, told Bloomberg that "[w]hile AI is undoubtedly a huge growth opportunity and a theme that investors should take seriously, buyers should beware."

What is AI?

AI is essentially "smart machines that can process information, reason and 'think' autonomously like a human being," Money explains, adding that AI works by "analyzing huge amounts of data to identify patterns that can be used to make predictions." There is also generative AI, which Kiplinger says "creates data, such as text, images and video," rather than simply finding patterns within existing data.

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While this technology has been around for a while, the launch and huge popularity of OpenAI's tool ChatGPT has brought the tech to the forefront. "AI has always had massive utility for businesses. But with the growing popularity of generative AI, like ChatGPT, consumers are realizing its utility in augmenting day-to-day activities," Steve Phillips, CEO and cofounder of consumer insights platform Zappi, told Kiplinger. "With AI in the mainstream, we can expect a sizable boost in business adoption to follow suit."

Are AI stocks just a fad?

"Even without factoring in the impact of ChatGPT and generative AI, the category was still poised for strong growth," Kiplinger argues. One estimate predicts that the AI market will grow from $118 billion in 2022 to $300 billion by 2026. Kiplinger contends that this "growth should mean great things for Wall Street's best AI stocks."

Still, the current frenzy over AI is "evoking memories of past bubbles," Bloomberg notes. It points to the past example of blockchain technology in 2017, when "there was a dash for exposure — both from companies and traders — only to see the frenzy fizzle and stock gains disappear." "We've had tons of episodes like this before where a group becomes hot and everyone just piles into everything related to it," O'Rourke of Jonestrading told Bloomberg in an interview. "As far as everyone who's betting on names and tickers, it will be a wild ride for them. If you're speculating, you're not investing."

How to invest in AI

Investors who are considering investing in AI should first do their research to ensure an understanding of AI, including its applications and ecosystem, Money recommends. Investors should avoid going all in on the trend. "Financial advisors also don't tend to recommend making big shifts to your investment portfolios based on the news — or exciting trends that everyone else is talking about," Money says. Rather, investors could consider making AI part of a diversified portfolio that's aligned with their risk tolerance, time horizon, and investing goals.

With these caveats in mind, there are a few different ways an investor could approach AI. There are individual stocks linked to AI technologies, or an investor could consider exchange-traded funds (ETFs) that are AI-focused. ETFs can offer more diversification than individual stocks.

Another option is investing in some of the major companies that are using AI, such as Amazon or Alphabet, Money notes. Lisa Chai, a partner and senior research analyst at ROBO Global, explained to Money that "[i]nvesting in large-cap stocks can give investors some exposure to AI, while taking some of the pre-development phase risk off the table."

Which AI stocks do experts have their eyes on?

For those considering dipping their toe into AI investing, here are some stocks flagged by Kiplinger and other experts as standouts:

  • Palantir Technologies: Palantir Technologies, a company created by PayPal founder Peter Thiel, was initially founded to use AI systems to "detect terrorism or threats on the battlefield," Kiplinger explains, but it has since branched out into health care, energy, and manufacturing. Forbes notes that "Palantir's stock dropped recently after the rise in long-term bond yields, and macroeconomic forces have harmed the company significantly over the last year," which has left analysts "mixed on predictions for Palantir." Still, Forbes contends that "the fact remains that data mining and storage capabilities will be essential for both governments and private companies in the coming years."
  • Nvidia: Kiplinger describes Nvidia as "the pioneer in GPUs, which provide for immersive graphics," though "the technology has also proven effective for advanced AI models." "Nvidia is still primarily a chip company in terms of current revenues," Zeno Mercer, a research analyst at ROBO Global told Kiplinger. "But its efforts across various AI disciplines could organically grow into a large percentage of revenue and also symbiotically boost demand for their chips." The company has faced its share of challenges, and "it's difficult to ignore just how pricey the company's stock has become given its reduced growth outlook," The Motley Fool points out. And yet, Kiplinger says that "for investors looking at a long-term play on AI, [Nvidia] looks like a winner."
  • Microsoft: Microsoft is a longtime household name that's investing $10 billion in ChatGPT creator OpenAI and "plans to use OpenAI's models in current and future products," Bloomberg reports. Forbes went so far as to call this investment a "no-brainer" given this recent investment, predicting that "[t[he deal should be profitable for Microsoft, as it will get a 75 percent share of OpenAI's profits until the AI company can pay back Microsoft's investment." This isn't the only thing giving experts confidence in Microsoft, though. "It's the company's cloud-computing investments that are most likely to drive Microsoft's operating results for the foreseeable future," per The Motley Fool, In fact, Muddu Sudhakar, CEO and cofounder of generative AI firm Aisera, told Kiplinger that he thinks companies like Microsoft "are the big beneficiaries of the AI revolution right now."

Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com

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