Time to Invest in AI – but Be Smart About It

By the time a trend reaches the headlines of the mainstream financial press, it probably too late for the smart money to invest in it. Yet, there are ways to gain exposure to the tech trends of today that will inform the way we work, live, and communicate for the foreseeable future.

It’s funny, how everybody and his uncle latches on to a trend and then abandons the old ones. Whatever happened to the non-fungible tokens (NFTs) that celebrities sold for hundreds or even thousands of dollars? Only in hindsight is it so obvious that the digital collectible bubble would burst so quickly.

Now, the headlines are buzzing about machine learning and artificial intelligence (AI). Computers have been able to learn and adapt on their own for years, but it took a free program, ChatGPT, to capture the attention of the masses.

Certainly, there’s no denying that machine learning will be here to stay. Unlike NFTs, generative/conversational AI programs like ChatGPT actually have utility. It unfortunate, though, that ChatGPT’s best-known use has been among students who would rather have a robot write their term papers.

ChatGPT, Google’s Bard, and other generative AI programs are far from perfect. They’ve been known to provide responses that are sometimes inaccurate, offensive, or even dangerous. Besides, the writing they produce tends to lack flow and common sense, sounds unnatural, and doesn’t offer original ideas or conclusions.

So, I disagree with Bill Gates, who once claimed that AI will be able to do everything that humans can do. Nevertheless, the robot revolution is here and it’s not going away within our lifetime. Does this mean it’s time to commit your hard-earned capital to AI stocks, though?

Courtesy: MarketWatch

As always, sensible investors must look before they leap. If you’re among the financial traders expecting a recession to occur in the near future – and there are reasons to believe this – then buying AI stocks now simply wouldn’t make sense.

After all, the high flyers of yesterday and today are likely to fall the hardest if there’s a recession on the horizon. And make no mistake about it: machine learning stocks rallied sharply earlier this year. An example would be C3.ai stock, with the stock ticker AI, which has more than doubled since January.

It’s gotten to the point where tech company CEOs purposely use the term “AI” multiple times during conference calls just to garner interest from investors. Sadly, this pathetic tactic actually works – or it will work until it doesn’t anymore.

That’s the main concern here: the burst of AI hype could fade at any given moment, even if machine learning’s impact lingers. If some other trend grabs the market’s imagination, AI stocks are liable to fall by the wayside.

I can’t tell you what to do with your money, but personally, I’m not loading up on AI-centric stocks like C3.ai, BigBear.ai Holdings (BBAI), and SoundHound AI (SOUN). Those three names received plenty of attention from retail traders, and I tend to avoid crowds as an investor.

Moreover, none of those three companies has a P/E ratio, and that’s because they’re unprofitable. It just goes to show that gaining the attention of the media and amateur traders doesn’t necessarily mean a company is on solid financial ground.

Courtesy: Yahoo Finance

In contrast, Alphabet (a.k.a. Google) stock, which has the stock tickers GOOG and GOOGL, is profitable and has a fairly reasonable P/E ratio of around 27. As you can see in the table shown above, Alphabet’s beta isn’t very different from that of the S&P 500, so you probably wouldn’t have to deal with extreme volatility with GOOG stock like you would with smaller AI-related stocks.

Meanwhile, Microsoft’s (MSFT) P/E ratio of 34 isn’t quite as attractive, but at least the company is profitable and has been that way for a very long time. Granted, GOOG and MSFT stock won’t provide pure, direct exposure to AI. For that, you’d have to invest in something riskier.

Or, you can just relax and take no action whatsoever. Like it or not, pretty much anyone with a standard company-supplied retirement account has some exposure to AI-facing companies. Ironically and alarmingly enough, AI might actually end up selecting their investments someday, if that’s not happening already.