The Winners and Losers of the AI Frenzy

What is AI?

Artificial intelligence (AI) is the implementation of technology to replicate and reduce the reliance on human intelligence processes across a variety of situations, interactions, and industries. Despite AI’s rapid boom in popularity and dominating the discourse over the past year, the concept isn’t new – as a matter of fact, the concept has been around since the 1950s.

Additionally, whilst the concept might seem somewhat abstract, technical and complex, many people use AI in their everyday lives without even realising. For example, the digital virtual assistants such as Apple’s Siri and Android’s Alexa are powered by AI.

When you ask one of these sophisticated tools what today’s weather is or who won the Champions League in 2021, for instance, the answer is a result of robust and impressive machine-learning algorithms. The frenzy which has taken the world by storm is largely built on the basis that the incorporation of AI across industries and the improvement of this technology is likely to have an excellent tailwind for businesses.

Learn how to trade or invest in artificial intelligence

Who has benefited so far?

Understandably, the firms that offer technical software as a service, or make great use of technology in their core business model, will likely be the largest beneficiaries of the AI revolution. The most obvious names and those that have taken 2023 by storm are the large US tech names notably Alphabet, Amazon, Microsoft, Meta and Nvidia.

Nvidia in particular has had a stonking 2023, largely due to the AI boom. In May, it reached the coveted trillion-dollar market capitalisation status on the back of its rising valuation.¹ Nvidia’s core business operations including GPU production, semiconductors as well as AI software and hardware are most likely going to be galvanised as we move into a more AI-dominated world.

Yet, it isn’t just the firms who are enabling the expansion and use of AI who’ve been and are set to be rewarded. There are companies who’ll embrace AI and use it to create a significant uplift in their own productivity and operations. For example, in healthcare, AI-powered startups are gaining significant traction as AI and machine learning are set to continue to streamline and improve the industry.

US firms haven’t been the only ones to reap the rewards of this new craze, with firms listed across other countries also advancing. Darktrace, the UK company has seen its shares rise in value by more than 20% year to date as AI is pivotal in its cybersecurity technology and machine learning systems.² The Dutch chipmaker ASML has also seen its shares rally this year as it’s set to continue being a major chip manufacturer in a more technologically advanced world.

It's also quite clear to see across the various global stock market indices and sector-specific indices which firms and industries seem to have benefitted. As seen in the graph, the FTSE 100, which has a distinct absence of technology firms is relatively flat year to date whilst the tech-heavy NASDAQ Composite, known as the US Tech 100 on our platform, has rallied substantially so far this year.

Who might be penalised?

While there are many potential benefits of AI for a range of industries that embrace the new developments, others may find their business shares eaten away in this new technological age. It’s unclear which businesses may meet their demise at the hands of more efficient and AI-powered technologies, but certain areas could be under more threat than others.

It's likely that the losers will consist of businesses that will have their unique selling point, or their competitive advantage dented by AI. An example of this occurring is Chegg Inc, whose core business proposition has been undermined by ChatGPT. As a result, its share price has plummeted since November 2022, the very time the use of ChatGPT began to gain traction.

Other businesses that may struggle include those that rely significantly on large head counts and those in the information processing industries. These industries are particularly exposed because jobs that require programme and technical skills may be closely linked with ChatGPT’s capabilities.

How has AI performed in 2023?

As touched on earlier, AI – on aggregate – has had a stellar 2023 with beneficiaries and AI-enablers typically seeing healthy advances in their share price. This can be exemplified by having a look at how various thematic ETFs in the space have performed. WisdomTree Artificial Intelligence ETF and iShares Robotics and Artificial Intelligence Multisector ETF have both posted gains of more than 20% since the start of the year, well above the S&P 500’s +13% performance.^3,4

Both ETFs’ holdings contain significant overlap with Nvidia, Splunk, Meta, Amazon and Alphabet, amongst many others, appearing in both underlying holdings. Whilst the ETFs performances this year have been nothing short of outstanding compared to various global indices, looking at the valuations of the assets is always relatively worthwhile for investors when considering whether to add to, or open, a position.

Nvidia’s price-to-earnings ratio (P/E) has skyrocketed to 197 at the time of writing from 50 at the start of 2023.⁵ Despite this surge, this isn’t quite as high as during the Covid rally – which greatly benefitted tech. To put it into context of how high the stock price is, it would take 197 years for an investor to earn what they paid for the stock if Nvidia distributed its entire earnings as a divided each year.

Even though AI looks set to be revolutionary for companies and all sorts of institutions, investors should be aware of the risks of sudden corrections. For example, if investing in an area of the market which is particularly overvalued, an abrupt change of sentiment could be a painful experience for an investor piling in at a particularly high valuation.

How can I invest in AI?

There are a plethora of ways to invest in AI and take advantage of this leap in technology. The most direct way of doing this is investing in a company that is either a producer of AI technology or a company that is set to benefit from the increase in uptake of AI.

For example, purchasing shares in Nvidia may be a beneficial way to take advantage of a company who produces AI-related services. Alternatively, if you want to invest in the AI frenzy at more of an arm’s length, investing in a company set to utilise AI extensively could be worthwhile. Companies in areas such as healthcare may see significant benefit to their business models using AI-related technologies and see a rise in earnings, and subsequently their share price.

While investing in one specific company that benefits from AI certainly makes you as an investor susceptible to the ebbs and flows of not only the sector, but particularly of the company, a potentially beneficial investment to combat this could be exposure to AI thematic ETFs. WisdomTree Artificial Intelligence ETF, iShares Robotics and Artificial Intelligence ETF as well as HAN-GINS Cloud Technology Equal Weight ETF provide diversified exposure to firms that spearhead AI development.

Through our competitive and state-of-the-art share dealing platform, you can purchase shares, ETFs and investment trusts and take advantage of the move towards an AI-focused world. For more details on how to buy your favourite AI-related securities, head to our share dealing platform.

Sources:

¹ Reuters, 2023
² The Motley Fool, 2023
³ WisdomTree, 2023
⁴ Nasdaq, 2023
⁵ Tip Ranks, 2023