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Artificial intelligence (AI) has been one of the hottest investment themes of 2024. AI has existed in some form for several decades, but since the public debut of ChatGPT – a large language model-based chatbot – and other programs like it, investor enthusiasm about AI has soared.
While some believe AI represents an investment gold mine, others believe it is overhyped and may be approaching “bubble” (overvalued) status. Fisher Investments Canada believes 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, such as 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 help 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 health care to agriculture, the potential of AI is enormous and has investors excited.
Fisher Investments Canada knows that 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 help 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 large companies in the United States 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.Provided
How Fisher Investments Canada advises 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 home run.” In Fisher Investments Canada’s review, investing in small, privately held AI companies is usually too risky for most individual investors.
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 startups 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 per cent 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 Fisher Investments Canada calls “tech-like” companies in parts of communications services, consumer discretionary and, to a lesser extent, industrials sectors. 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.
Exhibit 2: Investing Realities of AI – Adding Exposure to AI Today
Semiconductors & Hardware
In the semiconductor and hardware space, advanced semiconductor firms and equipment suppliers play a crucial role in developing the chips needed to support artificial neural networks, large data centres and cloud storage facilities. Unsurprisingly, these companies have experienced significant growth due to the increasing demand for AI—and data storage and processing—in recent years.
Examples of companies in this space include: Nvidia, Advanced Micro Devices, Taiwan Semiconductor Manufacturing Company Limited, Advanced Semiconductor Materials Lithography, Lam Research Corporation, Tokyo Electron, Broadcom, Apple, Intel, Dell, HP, Super Micro, Lenovo, Arista Networks, Cisco, Coherent, Lumentum, Infinera, Qualcomm
Cloud Infrastructure
According to Fisher Investments Canada, major tech and tech-like companies, and those with cloud infrastructure, cloud storage and computing businesses, have also seen a rise in demand as they expand their computing and storage capabilities.
Examples of companies in this space include: Microsoft Corporation, Alphabet Inc., Amazon.com Inc., Oracle Corporation, Meta Platforms Inc., Alibaba Group Holding and Baidu Inc.
Software
On the software side, some companies have begun developing and implementing AI technologies within their existing programs. Indeed, these companies may use AI to help drive business or efficiency gains within their software programs.
Examples of companies in this space include: Salesforce Inc., ServiceNow Inc., Oracle Corporation, SAP, Workday Inc., Intuit Inc., Adobe Inc., Synopsys Inc., Cadence Design Systems Inc., Atlassian Corporation, C3.ai Inc., HubSpot Inc., Fortinet Inc. and Palo Alto Networks Inc.
Fisher Investments Canada believes 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 time for companies further down the value chain to see material revenue growth solely from AI offerings. That’s why we think it’s more appropriate to invest in AI as part of a broader, globally diversified portfolio for most investors.
Using AI as an investing tool, according to Fisher Investments Canada
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 Fisher Investments Canada’s review, 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.
Read Fisher Investments Canada's additional reviews of markets and financial topics.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
Fisher Investments Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.
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