AI stocks, otherwise known as shares exposed to the mega artificial intelligence tailwind, are currently attracting the attention of ASX investors.
The big ones aren't in Australia — they're mostly listed on the NASDAQ-100 Index (NASDAQ: NDX) in the United States, and several are constituents of the much-lauded Magnificent Seven, such as NVIDIA Corp and Microsoft Corp.
AI is certainly the next big thing in technology, but more than that, it's also seen as a potential answer to the longstanding issue of poor productivity growth in Western economies.
Henry Fisher of CMC Invest says demand for AI technology "could be a defining trend this decade".
In a blog on asx.com.au, Fisher outlines some tips for investors interested in AI stocks to consider.
We summarise a few of them here.
Image Source: Getty Images
6 tips for buying AI stocks
1. Understanding the AI ecosystem
AI comes in many forms — generative AI, cloud computing, robotics, AI chips (graphics processing units), data centres, and more. "Given the range of investment options, it's important for investors to deepen their understanding of the AI landscape, as there isn't a one-size-fits-all approach," Fisher says.
2. It's early days for AI stocks
Fisher says investing early in new technologies can be risky. He points out that only 48% of dot-com companies survived past 2004, and many that did suffered significant share price falls.
He comments:
Today's AI landscape may have long-term winners and failures, and new AI companies may emerge down the line. Balancing these risks involves considering the uncertain timeline ahead and managing fears of missing out.
3. But AI is going to evolve quickly
The speed of AI's development and adoption is a key factor to consider, says Fisher.
The internet and mobile phones pave the way for AI tools to reach people even faster and become more integrated into everyday life. Grasping the exponential qualities of the AI trend is essential, as is evaluating the potential risks and rewards associated with the pace of its proliferation.
4. Picks and shovels AI stocks
Picks and shovels shares are companies that provide the tools and services an industry needs. Fisher reminds investors that AI stocks will include picks and shovels businesses.
For AI, this could mean businesses like chip makers and data centres. These investments can be strategic, as they could benefit from the broader trend while maintaining diversified revenue streams.
However, just as computers have shrunk from the size of a room to the size of our hand, AI hardware could also evolve over time. The tools powering AI in five or 10 years may differ from today's.
As we recently reported, Australia's biggest real estate investment trust (REIT) Goodman Group (ASX: GMG) is leaning into the AI trend by building the data centres required to make it work.
AI was a significant tailwind for Goodman in FY24, with the share price rising 73.1%, partly due to AI hype.
5. ETFs provide diversification
Fisher says AI-focused exchange-traded funds (ETFs) could be a strategic way to tap into the trend but warns:
Investors should be aware that holdings and strategies can vary widely among ETFs: some may include big tech names, where AI is just one component of a diversified business, while others may combine AI with other technology themes.
6. Competitive landscape
Fisher says the AI landscape is crowded, comprising approximately 75,700 companies. He questions what a 'competitive advantage' may look like in such a new world.
Start-ups with disruptive ideas can do more with less, with AI taking on a range of tasks and freeing up employees.
Meanwhile, big tech players could leverage their network effects and economies of scale to integrate AI into their existing platforms.
Competition is pivotal because, in the world of AI, one company's software update can put another company out of business.
Foolish takeaway on AI stocks
Fisher says AI is rapidly changing by nature. This means investors must be on top of evolving trends and willing and able to switch investment strategies quickly.
He recommends undertaking thoughtful research before selecting which AI stocks to invest in.
"A long-term, diversified approach to AI through ETFs is a consideration," he said.
