Is investing in AI stock a good idea? 

In 2023, stocks in Artificial Intelligence (AI) skyrocketed and became the main driver of the Nasdaq Composite’s growth. Even though the market was going through a downturn that sent many stocks plummeting, the Nasdaq Composite has fared so much better, with a 44% growth rate year after year.  

What was behind last year’s growth spike in the Nasdaq Composite? Investor enthusiasm for AI stocks. Although the excitement and investment in AI companies is on the uptick, it is unclear whether investing in AI stocks or investing in AI companies is a viable investment strategy.  

In this article, InvestmentNews seeks to shed some light on investing in AI. Let’s get into it.  

Introduction to AI investing 

A successful investor, philanthropist and author of one of the best-selling books made a simple yet brilliant quote on investing. His name is Peter Lynch, and he advises to “invest in what you know”. 

When it comes to stocks or ETFs of tech companies that invest in AI technologies, it would be wise, then, for investors to know what they can first about AI before they buy AI stock. 

What is artificial intelligence?  

Artificial intelligence is the simulation of human intelligence processes by computer systems. This mimicry owes itself to specific AI applications such as:  

• expert systems 
• natural language processing 
• speech recognition 
• machine vision 

What are deep learning and machine learning?  

These terms are often used interchangeably but they are very different. AI is an umbrella term coined as far back as the 1950s to denote the simulation of human intelligence in machines. Machine learning and deep learning fall under AI.  

• Machine learning gives software the ability to “learn” and make itself more accurate at anticipating outcomes without programming it to do so. Machine learning algorithms harness historical data as the input for predicting outcomes, which is the output.  
• Deep learning is a subcategory of machine learning where AI uses an artificial neural network that’s designed to work and behave in the same way as the human brain. This is one of the more recent innovations in the field of AI, and it’s behind the latest AI-driven tech like self-driving cars and ChatGPT.  

Where can I find AI stocks? 

Investors and advisors can find AI stocks on the major stock exchanges. They are not under a specific classification yet. AI stocks are usually categorized as tech stocks, as there is no official sector designation exclusively for AI companies. For example, you can find Nvidia stock on Nasdaq, and C3.AI on the NYSE.  

Investors may notice that AI stocks are sometimes lumped together as a loose collection of companies that dabble in artificial intelligence. These include major tech companies like Microsoft, Google, and Apple, who are all developing their own AI technologies.  

Other tech stocks such as microchip manufacturer Nvidia are instrumental in making chips for AI neural networks. There are also a few companies that are chiefly concerned with AI, such as C3.AI.  

What are the AI stocks I should consider?  

As of April 2024, these are the top-performing AI companies whose stock you may want to put money into. These stocks have provided massive returns and are predicted to still grow in the coming years: 

Savvier tech or AI stock investors might notice that Elon Musk’s Tesla Inc. (TSLA) is not on the list.  

Once considered a promising investment, TSLA stock has become one of the worst-performing stocks on the S&P 500, with 1-year returns at –19%.  

Why invest in these AI stocks? 

Before you decide on including individual stocks of AI companies in your investment portfolios, consider their risks and look at some key metrics first.  

All the above-listed stocks trade on major US exchanges. They have shown solid growth with great future potential for even more growth. It’s worth investing in these AI stocks because:  

1. They’re AI-linked. These listed companies are involved in AI, albeit in different capacities. They are classified as either:  

• enablers - create products or technologies that go into AI 
• engagers - use AI products  
• enhancers - build on the technology 

2. They have at least one high-ranking metric. Each AI stock on the list is a leader in at least one area.  

Nvidia, for example, is the leading manufacturer of AI-enabling chips, known as Graphics Processing Units or GPUs. Since the AI industry is new, and some of the companies are new, not all the stocks share the same features. 

3. They can give high growth and/or high return. Stocks were selected based on their projected EPS growth and their one-year return or both. The AI stocks were chosen based on these measures and on their predicted performance. 

Apart from these metrics, all the listed AI stocks have a market cap of at least $1 billion, a stock price above $5, plus a significant daily average volume of at least 500,000 shares. An investment portfolio with some AI stock will surely benefit from their returns.  

Of all the tech or AI stocks, one company has the top spot: Nvidia. Investors who buy this stock can likely see great returns. According to this video, in the beginning of 2024, Nvidia beat revenue expectations by a huge margin of 265%. This is due to the company’s massive revenues from its main product, graphics processing units (GPUs) for gaming and chips for generative AI and cloud computing.  

Are there special funds like ETFs for AI stocks? 

Yes! Even though stock exchanges have yet to classify these AI-dabbling companies as AI stocks, there are a few ETFs that are AI stock ETFs. Investors interested in AI stock can look at:  

• Indxx Global Robotics & Artificial Intelligence Thematic Index  
• Nasdaq CTA Artificial Intelligence & Robotics Index  

Both these indexes are tracked by ETFs. Investors can also search for AI ETFs with an ETF screener and use the keywords “artificial intelligence” in their search, or use “machine learning” or “AI”. These keywords can point you to several AI ETFs, although you are cautioned to thoroughly research the stocks contained in these ETFs.  

Investors may find that some ETFs place “AI” in the name but aren’t truly AI companies; they may only be invested in AI-connected companies. Other ETFS may simply be ETFs that use AI-powered trading but are not strictly invested in tech nor are they truly AI stocks.  

This guide on investing in ETFs is a good starting point for anyone new to ETF investing. 

How do I invest in AI stocks? 

Investing in AI stocks is no different from investing in any other type of stock. Whether you’re a finance professional, beginning or experienced investor, basic investing principles apply here as well.  

Advisors or investors must apply the same due diligence; do research and make sure to understand the AI industry and the companies linked to it. Don’t forget to consider the usual investing factors like:  

• risk tolerance or appetite 
• risk assessment and risk management 
• time horizon 
• financial goals 

When you have ample knowledge of the industry and companies, you can then advise your client to invest in the AI stocks with the best long-term potential.  

How do I buy AI stock that’s not on the S&P500, Nasdaq or other major exchanges? 

If the AI stock is not listed on a major exchange, it’s possible to purchase them over the counter (OTC).  

If that is the case, practice due diligence. 

OTC stocks, even if they are usually inexpensive, can be highly volatile and illiquid, making them difficult to buy and sell. So before buying or even gifting AI OTC stock, make sure it’s a viable investment.

Should I use AI to invest in AI stock?  

As of now no AI exists that fully automates the investment process. However, if you are already using a robo-advisor, you are already using AI to invest. Robo-advisors are digital trading platforms that use AI and machine learning to optimize and automate some aspects of the investment process.  

Apart from using robo-advisors, some investors have turned to using generative AI like ChatGPT to ask for suggestions on investing in AI or other stock. ChatGPT can only offer personalized investment advice and may not always have accurate or updated information.  

What do future trends in AI tech look like?  

2023 was the year for generative AI like OpenAI’s ChatGPT and Dall.E2, Google’s Bard (now Gemini), and several others. Here’s what 2024 and beyond may have in store for AI:  

• Next-generation Explainable AI (XAI) - we may see a surge in XAI solutions that make AI models more transparent and understandable. This will not only build trust and reduce bias, but also accelerate innovation and adoption. 
• AI-based physical tools - advancements in AI and robotics may further erode the lines separating digital and physical realms. More robots that can do complex tasks in healthcare, manufacturing, and even customer service may soon become commonplace. 

• More AI democratization – while OpenAI has a solid lead position when it comes to generative AI, open-source tools and platforms like StabilityAI are also gaining popularity. There may be more open-source AI tools and platforms coming in the next few years that can give individuals and small businesses AI-powered tools for their specific needs. 
• New workplace roles or jobs - While AI may replace or automate some jobs or tasks, it can also create new ones. We have already seen new occupations like Prompt Engineer and AI Personality Designer. Other AI-related jobs like ethicists, trainers, and curators will crop up along more human-AI collaborative roles in various fields. 

Why invest in AI?  

Investing in AI stock is a compelling opportunity for investors looking to capitalize on the world-changing potential of this technology. But it's important to approach AI investment with no less than a thorough understanding of the technology, the market, and the potential risk.  

As the great Peter Lynch once said, "If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.” With this strategy, investors can understand and minimize risks better and avoid less profitable AI investments.  

As AI continues to spur innovation, transform other existing industries, and create new ones, those who invest in it with a strategic mindset and informed decisions can see great rewards in the coming years.  

Read and bookmark our Fintech section for news and updates on investing in AI and other emerging technologies.