Beware of AI stocks.

If AI is the new electricity, does that mean AI stocks are the new GE?

That’s not right, though. AI, besides its incredible usefulness, is in a hype. More people want to do something with AI nowadays. For good reasons, of course.

Historically, startups with incredible promises have gone down. But their adjacent businesses thrive. I guess the same will happen to AI stocks as well.

While AI startups may have high risk, when you win, you win big. On the other hand, giants who act as AI enablers (e.g., Google) don’t significantly impact their profits because of their portfolios. Then, who are the winners?

Before diving in, this post is by no means professional advice. This is only my opinion about the future of AI stocks, and I’m not an experienced investor either. Besides, I believe no one can predict the stock market.

Is AI the Next Big Thing or a Mirage?

For those with a penchant for technology, it’s hard to resist the allure of the AI revolution. It’s like the modern Gold Rush, where innovators wield algorithms and neural networks instead of pickaxes and pans, prospecting for the next big breakthrough.

However, like every gold rush in history, not everyone who heads for the hills will strike it rich. In the tech world, history is rife with companies that looked promising on the surface but ended up becoming footnotes. This journey of investments is akin to sailing through a sea with numerous hidden icebergs.

The Landscape: Big Fish and Small Fish in a Rapidly Evolving Ecosystem

Let’s visualize the AI market as a vast, teeming ocean. In this ocean, you’ve got your nimble small fishes, startups like Jasper AI, with their cutting-edge technology and agile structures. These startups are like graceful dolphins, jumping from one wave to another, catching the eyes of onlookers with their swift maneuvers.

Then, you have the sharks – large corporations with vast resources and extensive reach. Companies like Canva, apart from their primary services, seamlessly integrate AI into their toolsets, enhancing value and appeal. It’s almost like a Great White Shark with a laser attached to its head – a formidable combination of size and tech!

Finally, there are the whales – the tech giants that provide infrastructure and platforms for AI to operate. These behemoths support the entire ecosystem, ensuring that smaller businesses can utilize the power of AI for their growth.

Pitfalls of the AI Investment Game: Not Every Fish Can Be King

However, as any marine biologist will tell you, the ocean can be unpredictable. No matter how swift or elegant a dolphin might be, it’s always at risk. The bigger sharks can gobble it up, or even worse, a newer, more vibrant dolphin might push it out of its territory.

This metaphor is evident in the case of Jasper AI. Once the talk of the town, it now faces stiff competition from solutions like Chat GPT and Bard. It’s like watching a swift cheetah overtaken by a younger, faster one.

Moreover, the rapid advancements in underlying models are also a challenge. Imagine building your home on a plot of land, and then someone tells you every few months, “Hey, there’s a better plot just around the corner!” The frequent model updates, such as the leap from GPT 3 to GPT 5 in under three years, can be daunting. Can companies pivot fast enough, or will they be left in the dust?

The Uncertainty Principle: Why the Wise Hesitate

This constant evolution and upheaval is perhaps why seasoned investors like Warren Buffet and Peter Lynch are cautious. Investing in AI isn’t just about spotting the right technology; it’s about understanding the company’s ability to adapt, innovate, and remain relevant.

The world of technology is littered with the carcasses of companies with novel ideas that fail to adapt. Remember Blockbuster? At one point, it was the go-to for movies. Then, in came Netflix, a more agile player with a better business model.

Today, even Netflix faces fierce competition from Amazon Prime, Disney+, etc. In the AI rush, the first mover advantage is more of a disadvantage.

The Illusion of Big Tech’s AI Impact

When one thinks of the tech giants pushing the boundaries of AI, names like Google and Microsoft immediately come to mind. With their vast resources and extensive reach, it’s easy to envision these behemoths at the forefront of the AI revolution.

But here’s the twist in the tale. Diving into the financials of these giants, it becomes evident that their AI undertakings, impressive as they might be, are just a drop in their vast revenue ocean. These companies are like colossal trees with numerous branches, and while their AI branch might be blossoming, it’s not the one bearing the most fruit.

Take their cloud services, for instance. As more entities train their AI models, it’s logical to surmise a surge in demand for cloud resources. But whether it’s GCP, Azure, or AWS, the cloud segment is just a fraction of these companies’ vast portfolios. Think of it as a shiny apple on a tree laden with diverse fruits; it draws your attention but doesn’t define the tree’s essence.

The Unsung Heroes: Powering the AI Gold Rush

Returning to our Gold Rush analogy, let’s shift our focus from the miners to the ones equipping them. The real victors of the Gold Rush weren’t always the gold miners but the merchants who supplied the pickaxes, shovels, and equipment. Similarly, in the AI boom, it’s not necessarily the companies harnessing AI but those providing the essential tools to make AI work.

Enter companies like Intel and NVIDIA.

These tech giants specialize in creating the chips and processors fundamental for AI to function. It’s like supplying the Gold Rush miners with the tools of the trade. Whether an AI startup strikes gold, they’ll need these chips to dig. As AI becomes more entrenched in our technological fabric, the demand for these “tools” will surge.

Intel and NVIDIA are poised perfectly in this narrative. They’re the backbone, the unsung heroes of the AI story. The companies harnessing AI might be in the limelight, but these chip manufacturers ensure the show continues.

Another way to think about the AI rush is who benefits from AI. Although AI has an impact on every industry, generative AI has an important role to play in industries like publishing and marketing. Look for companies that make use of AI and improve their productivity.

Conclusion: Navigating the AI Ocean with Prudence

So, should one steer clear of investing in AI? Not necessarily. However, diving into the waters without understanding the currents can be perilous. It’s essential to realize that while AI is disruptive, not every player in this space will come out on top.

For those looking to invest, it’s crucial to look beyond the immediate “sexiness” of an AI stock. Understand the company’s adaptability, vision, and resilience against the ever-changing tides of the tech ocean.

Ultimately, it’s not about chasing the shiniest fish but investing in the one that can navigate the treacherous waters of innovation, competition, and rapid evolution.