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Artificial intelligence (AI) gets so much buzz, the skeptic in me says stay away from this investing theme. But that would be a big mistake, money managers tell me.
In my defense, I can’t help but notice the insanely robust sales projections from all the usual suspects are reminiscent of the spectacular forecasts for tech companies in 1999 — right before the internet bubble burst.
But Dominic Rizzo, manager of the $3.2 billion T. Rowe Price Global Technology Fund
PRGTX,
pushes back with the reminder that the internet actually did go on to change the world. He expects the same for AI. “AI is an incredibly big deal,” he says.
Rizzo, of course, is not alone. “Artificial intelligence is about to revolutionize everything,” Bank of America’s head of thematic investing Haim Israel recently wrote in a comprehensive note on the topic. “This could be the ‘iPhone moment’ for AI.”
Why now? As with the internet in the 1990s, we are at a “defining moment” with AI today, Israel says. That’s because “large language models” like ChatGPT make it easy for everyone to use AI. And this means we can all let it loose on “big data” to mine for insights and entertainment. “Large language models like ChatGPT are finally enabling us to fully capitalize on the data revolution,” Israel adds.
The big difference now, Israel says, is that AI tools like ChatGPT can understand natural language and produce human-like dialogue. So, they “democratize data” and make it accessible to all without the need for training or experience.
There are a lot of data to mine. Israel notes that more data are created per hour now than in an entire year just two decades ago, and global data will double every two years. We’ll generate more data in the next two days than all the data created between the dawn of humanity and 2000, he says.
Read: AI is the word as Alphabet and Meta get ready for earnings
As with any “buzzy” tech revolution, expect pitfalls. Shares of the enterprise AI software provider C3.ai
AI,
tumbled more than 35% earlier this month after short-seller Kerrisdale Capital issued a report accusing it of accounting irregularities. C3.ai denied the allegations, and its stock is still up over 100% so far this year.
I recently checked in with money managers and tech experts to find companies that stand to benefit from AI’s growth, and which are less vulnerable to short-seller attacks like the one that took down C3.ai.
Here’s a quick look:
1. Synopsys (SNPS): Chip developers have to use software to design semiconductors. They turn to Synopsis
SNPS,
for help because it is the leader in electronic design automation software, Rizzo says. Synopsis also offers pre-designed circuits engineers use as basic building blocks in larger chip designs, rather than designing the basic components on their own. Synopsis is “mission critical” to chip design, so it checks the box for one of the key qualities Rizzo looks for in a tech company.
2. Advanced Micro Devices (AMD): AMD
AMD,
designs a broad array of chips used in computers and servers. But when it comes to AI, the key is the company’s new Instinct MI300. AMD says it is the most complex processor it has ever built. By combining the capabilities of central processing units (CPU) and graphics processing units (GPU) in one package, MI300 can turn the months it takes large language models ChatGPT need for training into weeks, says the company. “The future of AI is where you’re doing CPU and GPU workloads together, and the MI300 is a big breakthrough for that,” Rizzo says.
3. ASML (ASML): ASML Holding
ASML,
sells extreme ultraviolet (EUV) lithography equipment that helps chipmakers etch patterns onto semiconductor wafers. Without it, chip makers would have a hard time increasing the number of transistors on silicon – the process that continually makes chips more powerful. Its top three customers are Intel
INTC,
Samsung Electronics
005930,
and Taiwan Semiconductor Manufacturing
TSM,
Without ASML’s EUV equipment, chip makers could not continue shrinking chip size, the most important part of scaling the capability of chips, Rizzo says.
4. Microsoft (MSFT): Using AI effectively is expensive. So only a few companies have the heft to do it properly. Microsoft
MSFT,
is one of them, says Motley Fool tech analyst Asit Sharma. Microsoft has a partnership with OpenAI, the company that developed the AI chatbot ChatGPT. It is incorporating AI into its Bing search capabilities, which may help it steal some market share in search.
Even taking just a few percentage points from Alphabet’s Google
GOOGL,
in search would be accretive to Microsoft revenue, Sharma. adds. For example, a 1% share gain in search brings in an additional $2 billion of revenue for Bing, estimates Bank of America. Microsoft is also incorporating AI into business-facing services such as Azure, Microsoft’s cloud computing platform. “It solidifies customer relationships and gives Microsoft a competitive edge over other cloud providers,” Sharma says.
5. Meta Platforms (META): Meta Platforms
META,
CEO Mark Zuckerberg, chief product officer Chris Cox, and chief technology officer Andrew Bosworth now spend most of their time on AI, Bosworth told Nikkei Asia in a recent interview.
Meta has its own large language model called LLaMA. Meta has invested heavily in an AI supercomputer that will help distribute creator content. It is using an AI-powered “discovery engine” to increase the relevancy of content shown to users. “The new discovery engine should improve user engagement and targeting by better interpreting interests and signals interpreted by the AI,” says Bank of America analyst Justin Post, who has a buy rating on the stock. In its fourth-quarter earnings call, Meta said its AI significantly improved the effectiveness of ads run the platform.
6. Pegasystems (PEGA): Pegasystems
PEGA,
uses AI to help power its customer service software, one reason why Quent Capital portfolio manager Gregg Fisher owns the stock. AI-assisted calls help customer service reps anticipate what questions are coming and how to answer them, or what other products and services to pitch. The company says its AI personalizes customer experiences, streamlines customer service, and automates business processes and workflows.
7. Nice (NICE): Nice
NICE,
uses AI to improve its customer engagement software. It also uses AI to improve software that helps detect and prevent financial crimes including money laundering and fraud. The use of AI is a key component of Nice’s growth strategy says Bank of America analyst Michael Funk, who has a buy rating on the stock.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned NVDA, AMD, MSFT and META. Brush has suggested NVDA, AMD, MSFT and META in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks
More: Nvidia is AI hardware’s growth leader now, but Intel, AMD and others are closing fast
Also read: AI regulation: It could already be too late, technologists say
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