Background:
"Data is the new oil" AI is the new engine. With the massive amount of data collected from advanced software and applications, AI is seeking to put all this data into useful information that boosts productivity while reducing labor costs.
Artificial Intelligence (AI) has been a dominant and powerful driver of growth in tech stocks recently, primarily Microsoft, Apple, Google, Tesla and Amazon. While there is certainly AI hype in the mega-cap companies when it comes to AI, the scalability of AI and large language models and text-to-video models is still nascent, and it remains to be seen what will be the wheat and what will turn out to be just chaff.
AI-driven earnings growth will become a major driver for tech stocks in 2025, this according to Barclays strategists. Investments in AI continue to grow significantly, TD Cowen projects reaching over $1 trillion in capital expenditures. The focus of the future will be on the creation of standalone AI products and services, rather than simply AI aiding infrastructure or become essentially better plumbing for search engine technology.
The good news is that the U.S. is at the forefront of artificial intelligence technology and will transform the entire global economy in the years ahead. Some of the eye-popping numbers are $2 trillion in productivity improvements, and a reduction resulting from lower labor costs of approximately 15%, along with the replacement of up to 20% of worker tasks for 80% of the workforce, according to one report. The chart belowwill give you an idea which tasks are likely to be replaced, and which jobs will remain:
How have AI sector stocks performed in 2024?
The AI sector was strong in 2024. Take these companies for example:
1. Applovin (APP): Shares up 740% this year, largely driven by higher advertising revenue thanks to AI improvements.
2. Palantir Technologies (PLTR): Shares up 360% customers like the AI platform.
3. Vistra (VST): Shares up 260% on AI’s benefits to the utilities sector.
4. Constellation Energy Group (CEG): Shares up 90% on AI-related demand for electricity.
5. GE Vernova (GEV): Shares up 130%, again driven by AI electrification demand.
Gains have been primarily concentrated in the hyperscalers (e.g. Big Tech) and the semiconductor companies such as Nvidia.
How do we breakout the entire Gen AI industry?
Good question, because thus far most of the stellar revenue and earnings have come largely from the first leg in the AI journey –> semiconductors. These graphics processing chips (GPUs) are expensive, they can range from $30,000 to $40,000 or higher.
Once manufactured, the GPUs undergo rigorous testing, as they must meet performance and reliability standards. From the semiconductor fab the chips are shipped and installed in data centers. These data centers are part of the big tech companies mentioned in the beginning of the article. In the data centers, the GPUs are integrated into servers and high-performance computing systems, deployed for artificial intelligence applications and other data processing tasks such as machine learning.
Now comes the stage in our journey that is new and mostly yet future in terms of the ultimate products and services the big tech companies plan to offer via cloud service. These services power end products like personal computers and laptops and gaming consoles. In addition, from services such as data analytics, innovation in autonomous vehicles such as Tesla’s full-service driving and Waymo’s robo-vehicles, to medical imaging and more.
Beyond pure-play AI investments:
Most of the hype and excitement has surrounded Nvidia, the dominant developer, manufacturer and seller of high-end GPU semiconductors. Indeed, for many, Nvidia IS Gen-AI. Nvidia has seen Gen AI semiconductor chip sales grow over 100% over these past three quarters -- clearly a new era in technological innovation.
The stock has performed quite well, admittedly, but we need to look beyond the first stage and into what’s coming up next just around the bend so we can get into these investments earlier than the crowd.
As we see AI utilization expand into more and diverse companies, we will then get a better feel for which products, services and companies can we expect revenue growth and earnings so we can invest early on? This is not an easy question, and today it remains a debate among Gen AI techies and investors alike.
The opportunity for investors Is going to grow and blossom, but more patience is required. The challenge for an investor who wants to seek opportunities beyond the already high stock prices of the mega-cap tech group, is that we will see new start-ups coming from Silicon Valley venture capital and private equity. As of today, those new ideas haven’t yet manifested themselves in new companies.
So, what are the best future investments to keep an eye on?
In several recent earnings announcements, we heard from companies across a variety of industries, from discount chain retailers to farm equipment manufacturers that are deploying AI into their products. Betting on the best in class is challenging, but with a diversified investment approach, spreading your investments over several disparate AI companies, you are likely to have some hits and some misses. That is generally the approach the seasoned investors like to take.
Here are recommended sectors within AI that show promise:
1. Autonomous vehicle technologies. Companies like Tesla and Waymo we mentioned earlier are spearheading these efforts. Waymo, for instance, has set a goal to become the “world’s most trusted driver” and has demonstrated a 73% reduction in injury-causing crashes compared to human drivers in similar conditions.
2. Healthcare, where AI is expected to revolutionize drug discovery and development. Some studieshave claimed research and development costs will ultimately be cut as much as 70%. “We expect to see a continued high level of AI-enabled activity and investment in drug discovery, diagnostics, and related use cases across the healthcare industry.”
3. Software development will help developers with the automation of routine coding tasks. Tools such as GitHub Copilot will suggest “snippets” of code that are expected to boost productivity.
4. Education will be challenged by students’ overuse and overreliance on Gen AI’s superior search capabilities. Plagiarism will be far more difficult to detect. Nevertheless, AI is expected to offer personalized learning experiences, adapted to each student specifically, and enhance teaching through real-time feedback.
Summary:
You may have noted that the recommended sectors are no companies. This goes back to the infrastructure or plumbing metaphor we began with in this article. To the extent these products and services take off we will see start-up companies capitalizing upon them and exploiting the new technology.
Meanwhile, consider spreading your AI-related investments across several large companies already investing hundreds of billions to eventually bring AI products and services to fruition successfully. Consider too, an AI ETF and here is a very good resource for you to check out.
Good luck!
Rodd Mann writes about carving out a creative and unique new career in a changing world. His own career has taken him all over the world, working in accounting, finance, materials, logistics and manufacturing operations. Author, teacher, writer, consultant, Rodd has worked in many high-tech roles. Follow him here: www.linkedin.com/in/roddyrmann
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