The progress experienced by artificial intelligence is unprecedented. It is a technology that will change the way we live and work. And it will become a key sector of the economy of the twenty-first century. Next, we analyze reasons for investing in artificial intelligence, how to carry it out, and the risks that we must take into account.
- What is Artificial Intelligence
- Reasons to Invest in Artificial Intelligence
- Risks of Investing in Artificial Intelligence
- How Io invest in Artificial Intelligence
What is Artificial Intelligence
Artificial intelligence, also known as AI, is a term used to refer to the creation of algorithms and systems capable of performing tasks that usually require human thinking, such as reasoning, problem solving, and learning.
This makes it possible for computers and other types of machines to carry out specific tasks that, until recently, had to be done by humans. In a way, we can say that artificial intelligence makes it possible to copy the best features of the human brain.
Artificial intelligence has the potential to transform many aspects of society and the economy over the next few years. In fact, most sectors stand to benefit from it.
As a consequence, we are likely to experience significant progress in multiple fields, including programming, healthcare, the financial sector, and the creative industries.
As a result, the world economy could experience growth rates not seen in decades. Due to the high level of indebtedness in many developed countries, artificial intelligence offers a unique opportunity to improve the world´s macroeconomic situation.
At the same time, the emergence and growth of this new sector within the technology industry has the potential to create extraordinary returns for those investors who are able to bet on the right companies.
Reasons to Invest in Artificial Intelligence
As you can guess, there are many reasons why we should consider investing in artificial intelligence:
High growth rates
The tools that have come to market in 2023, such as ChatGPT or DALL-E, have shown the world what artificial intelligence is capable of doing in our day to day. The applications are almost endless, both in our personal life and the business world.
Some tasks have been simplified, such as information search, the composition of texts, translations, and even to program in languages such as Python.
For those able to extrapolate future applications of artificial intelligence, it is clear that it is a technology that will make our lives much easier, and workers much more productive.
However, the increase in productivity will be especially extraordinary for the future development of artificial intelligence itself. As the number of people in the sector, as well as their ability to launch new developments increase, artificial intelligence will become even more powerful.
Investing in the sector will make it possible for us to benefit from the growth that artificial intelligence will experience over the next few years and decades.
Business models of the future
Over the past few decades, the internet and mobile technology have become an integral part of our daily lives. As a result, many businesses have appeared that were unthinkable prior to the 1990s.
Businesses such as Google, Amazon, Facebook, Twitter, Netflix or Revolut exist thanks to the digitalization of the economy. The spectacular growth of companies such as Apple or Microsoft is also due to the changes that have taken place in the technological world.
In fact, several of these companies are among the most powerful and valuable in the world. This has made many investors rich over the past three decades.
Similarly, artificial intelligence will make new forms of business models possible in the future. Some examples could be advanced programming tools, tools for creating new digital content such as video games and movies, as well as platforms to integrate online commerce sites with AI applications.
For example, in the near future it will be possible to design the weekly diet for an entire family, personalized according to the characteristics and preferences of each individual, with the purchase made automatically by an artificial intelligence engine. Behind all these processes, there will be companies making money.
Investing in artificial intelligence will make it possible for our investment portfolio to start generating profits thanks to the massive adoption of services and products that will come to market in the coming years.
Business giants of the future
As we alluded to in the previous section, some of the companies that dominate the artificial intelligence sector may end up becoming real stock market giants.
The stock market price of companies such as Apple, Microsoft or Google has increased dramatically in recent decades. And such growth goes hand in hand with extraordinary returns for those shareholders who have been able to identify the trend.
For this reason, we can be sure that some of the leading companies in the artificial intelligence space will become heavyweights of the global economy.
It should not surprise us to see the price of some of these companies increase 50, 100 or even 1000 times in a period of a few short years.
At the same time, investing in economic sectors of the future such as artificial intelligence has the benefit of providing our portfolio with a greater degree of diversification.
If we already own stocks, which is very likely if we have an investment portfolio, we are already exposed to traditional economic sectors, such as industrials, luxury products, utilities, and even technology companies with established businesses.
If we are convinced that artificial intelligence is going to fundamentally change the way the economy works, we can expect many of the companies we own to be affected.
Even though artificial intelligence is likely to have a positive impact on many traditional companies, it is important for our investment portfolio to adjust as this new economic sector grows.
Risks of Investing in Artificial Intelligence
Investments in artificial intelligence, while very promising, also carry a number of risks that must be analyzed. This is because the growth of a sector does not necessarily make all those who invested in it rich:
Most companies may disappear in the coming years
One of the main problems of investing in very young and disruptive sectors is that we cannot predict which companies will be able to flourish in the future, and become cash flow generators for their investors.
In fact, only a small fraction of companies in early sectors manage to survive over the next few years.
This is similar to what happens with venture capital funds that invest in start-ups. A minority of start-ups will be able to grow their business and achieve positive returns for their investors. But most start-ups will fail, causing significant losses.
Thus, such a fate may even await some companies which at a given time had a significant advantage over their competition. For example, the most successful social network in history, Facebook, was not the first to come to market. Competitors like MySpace were already present in the space, but were unable to survive.
For those who decide to invest in artificial intelligence soon, it is likely that most companies will eventually disappear. However, those that survive can become great success stories.
Another risk of investing in artificial intelligence is that, due to the high interest on the part of the investment community, the valuation of many companies in the sector has skyrocketed..
Probably the largest investment that has been made in the sector so far has been the purchase of 49% of ChatGTP by Microsoft, in exchange $10 billion. This means ChatGPT’s valuation at the time of the transaction was over $20 billion.
Paying high valuations may be justified when a company’s growth forecasts are very favorable. However, high valuations also lead to lower future returns, as we have to pay more to acquire a piece of that business.
As a result, high valuations reduce the future return on our investment, and expose us to a greater risk of loss.
The disruptions that artificial intelligence will cause over the next few decades will likely motivate governments to step in and impose new regulations on the sector.
These can come in the form of prohibitions, taxes, fees and additional bureaucracy. In any event, these regulations can lead to higher operating costs for companies in the sector, as well as relatively lower growth rates.
While government regulation will not be able to stop progress in the field of artificial intelligence, it may cause a decline in the profitability of investments in the sector. Ultimately, governments will want to extract a portion of the economic value that has been created for themselves.
How to Invest in Artificial Intelligence
After having discussed the reasons why we should invest in artificial intelligence, as well as some of the precautions we need to take into account, let us take a look at how we can do it:
Listed AI Companies
One of the simplest options to invest in artificial intelligence is to pick exchange-traded companies in the sector and put our money there. It is one of the most direct ways to expose our investment portfolio to the development of this growing market.
Some examples of listed AI companies, as well as their respective tickers, are listed next:
- UiPath ($PATH): US robotic software company that uses AI to automate repetitive tasks for corporations.
- C3.ai ($AI): A US software company that uses artificial intelligence and machine learning to analyze large amounts of data and help companies make more informed decisions.
- Palantir Technologies ($PLTR): Data analytics software company that uses artificial intelligence to help corporations and government agencies analyze large amounts of information. With close ties to the US government.
- DataRobot ($DRT): Machine learning platform that uses artificial intelligence to help companies build their own machine learning and predictive analytics models. Based in the United States.
- Appen Limited ($APX): Australian natural language processing technology company that uses AI to help businesses improve text understanding and analysis.
- Darktrace ($DARK): UK-based cybersecurity company that uses artificial intelligence and machine learning to detect and respond to cybersecurity threats.
- HelloFresh ($HFG): German meal delivery company that uses AI to personalize its menu recommendations and improve the efficiency of its supply chain.
Large companies with significant investments in AI
In the same way that there are medium and small companies dedicated almost exclusively to artificial intelligence, there are some large companies that are making very aggressive investments in this field with the aim of having a dominant position in the future.
While these companies’ businesses are still dominated by other products and services, it is likely that AI will become increasingly relevant:
- Alphabet or Google ($GOOGL): Google’s parent company has invested significantly in artificial intelligence, especially in areas such as natural language processing and digital vision.
- Microsoft ($MSFT): Microsoft is developing its own machine learning framework, Azure Machine Learning. It is also making investments in other companies in the sector, including ChatGPT.
- NVIDIA ($NVDA): Company specialized in the design of high-power chips and semiconductors. NVIDIA is developing hardware for AI acceleration and deep learning.
- Amazon ($AMZN): Amazon offers cloud computing services that include machine learning tools and natural language processing. These services are available through Amazon’s most profitable division, AWS.
- IBM ($IBM): IBM has been adapting its business model to changes in the technology sector for many decades. It is making significant investments in AI.
Artificial Intelligence ETF
Another stock market option to invest in the sector is through an ETF composed of artificial intelligence companies. This may be the best alternative for those investors who simply want to bet on AI without having to choose companies individually.
It is also a good option to avoid the risk of investing in companies that may end up disappearing in the future, as we have discussed in a previous section.
An artificial intelligence ETF makes it possible to invest in several companies in the sector at the same time, easily and conveniently. At the same time, the basket of companies within the fund will be automatically updated as changes in the sector take place.
Another option is the Xtrackers Artificial Intelligence & Big Data UCITS ETF, managed by DWS. This fund aims to replicate the Nasdaq Yewno Global Artificial Intelligence and Big Data stock index.
Both ETFs are available on most online brokers, including Interactive Brokers. Obviously, there are many more options available, so you just have to choose the one that suits you best.
Artificial Intelligence venture capital fund
For those investors who are more sophisticated, it is also possible to carry out an investment in a venture capital fund that invests in start-ups in the artificial intelligence sector.
While most of these companies will fail over the first few years after launching, causing losses to investors, the few companies that succeed can create enormous returns for their investors. As a result, a small number of companies may be responsible for most of the fund’s profits.
It should be noted that venture capital funds are usually only available to investors with a significant asset base.
Sectors that can benefit from the growth of Artificial Intelligence
Finally, it is also possible to participate in the growth of AI by investing in sectors that can benefit indirectly from it.
For example, artificial intelligence will require computers and other hardware elements to be more powerful than they have ever been. At the same time, it will also be necessary to use more electricity to power the servers reliably
Therefore, some economic sectors that can benefit from the rise of artificial intelligence are companies that produce microprocessors, copper mining companies, and even the nuclear power sector, capable of generating abundant electricity.
There is no doubt that the world is experiencing an unprecedented technological revolution. Although the majority of the population is not aware of this, the way we live and work will change radically over the next two decades.
In the same way that the arrival and mass adoption of the internet has fundamentally transformed how we live, the integration of AI into our daily lives is unstoppable.
Although part of the population fears the changes that this new technology can bring, our lives will end up being much more comfortable and efficient.
By the same token, it is very likely that the world will experience a true productivity boom. A worker with access to AI tools is much more productive than a worker without those same tools. This can lead to higher economic growth, raising the standard of living for society.
By investing in artificial intelligence, we will further enable the sector to develop, while potentially achieving great returns if our companies manage to establish highly profitable business models.
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