Over the last three decades, investors have enjoyed no shortage of next-big-thing investment opportunities. This includes the advent of the internet, which changed the growth trajectory for corporate America, as well as genome decoding and blockchain technology, to name a few trends.
However, no investment trend has garnered as much buzz since the internet took center stage in the mid-1990s than artificial intelligence (AI). AI involves the use of software and systems in place of humans, with machine learning giving these systems the ability to evolve over time and become more proficient at their tasks.
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Although estimates vary widely on the potential for AI -- which isn't unexpected given that businesses aren't entirely sure how AI can improve their sales -- the analysts at PwC believe it'll add north of $15 trillion to the global economy by 2030. That's a lofty figure which isn't going to be ignored.
No company has been a more direct beneficiary of the AI revolution than semiconductor titan Nvidia (NVDA 0.06%).
The face of the AI revolution may be in a bubble
Nvidia's claim to fame has been its infrastructure, which has quickly become the foundation that fuels AI-accelerated data centers. Specifically, Nvidia's A100 and H100 graphics processing units (GPUs) are forecast to account for in the neighborhood of 90% of the GPUs deployed in high-compute data centers this year. Nvidia also recently unveiled its next-generation chip, Blackwell, which can expedite data processing, as well as power quantum computing and generative AI solutions.
Nvidia has been undeniably aided by enterprise demand handily outstripping the supply of its high-powered GPUs. Phenomenal pricing power was the clear catalyst that sent Nvidia's data center sales soaring by 217% in fiscal 2024 (ended Jan. 28, 2024).
But when things seem too good to be true in the corporate world, they usually are. While catalysts have been aplenty for Nvidia since the start of 2023 -- it's added almost $1.8 trillion in market value in less than 16 months -- quite a few headwinds suggest this AI darling may be in a bubble.
Nvidia's three biggest enemies look to be history, itself, and its top customers.
With regard to the former, there hasn't been a next-big-thing investment over the last 30 years where investors didn't overestimate the adoption or uptake of a new innovation/trend. Every single highly touted technology or trend has endured an early stage bubble. There's a good chance we're going to see AI stocks perpetuate this pattern and, at some point soon, fail to meet investors' lofty growth and adoption expectations.
The second potential problem for Nvidia can be found by looking in the mirror. Nvidia's sales growth was driven by its GPU pricing power last year. As new competitors enter the arena and Nvidia increases production of its A100 and H100 GPUs, as well as introduces new chips, GPU scarcity will steadily decline. In short, Nvidia will be harming its gross margin as it expands production.
But the scariest thing of all for Nvidia might just be that its top four customers, which comprise roughly 40% of its sales, are developing AI chips of their own. Regardless of whether these trillion-dollar businesses aim to use their in-house chips in complement with Nvidia's GPUs or replace them entirely, the point is that orders from these top customers have likely peaked.
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This exchange-traded fund (ETF) is the smartest and safest way to invest in artificial intelligence
Although Nvidia has been the very clear winner among AI stocks, it also, arguably, has the greatest risk for downside if history proves accurate and the AI bubble bursts. Thankfully, there's another way investors can gain AI exposure at the click of a button without dealing with the risk of putting their money to work in a possible bubble stock.
Exchange-traded funds (ETFs) hold a basket of securities that often have a specific focus. For instance, investors can purchase ETFs in large-cap stocks, growth stocks, emerging market companies, and so on. There are quite a few ETFs that provide exposure to the artificial intelligence revolution.
However, not all ETFs are created equally. In addition to variances in their net expense ratios (the fees charged to manage an ETF), there can be sizable differences in diversification or concentration.
For example, the Invesco QQQ Trust (QQQ 0.52%) is an ETF that attempts to mirror the performance of the growth-focused Nasdaq-100. Many of the top AI companies are included in the Nasdaq-100, such as Nvidia, Microsoft, Meta Platforms, Amazon, and Alphabet.
Unfortunately, the Invesco QQQ Trust isn't very diversified. The top seven companies by allocation account for more than 42% of its weighting, with Nvidia chiming in at roughly 6%. If the AI bubble bursts, the Invesco QQQ Trust is probably going to get walloped.
The one off-the-radar ETF with artificial intelligence exposure that makes for a smarter and safer investment than Nvidia is the Robo Global Robotics and Automation Index ETF (ROBO 1.08%). Though it has a reasonably high net expense ratio of 0.95%, this ETF's focus and diversification fully merit the premium.
What helps the Robo Global Robotics and Automation Index ETF stand out is its various investments in the companies behind the technology used to create intelligent systems, as well as in the company's putting intelligence systems and robotics/automation to work. In other words, this isn't a pure-play AI ETF. Rather, it's an established ETF (its inception occurred in October 2013) where AI happens to be one of its many focuses. Thus, if the AI bubble were to burst, a majority of the companies this ETF is invested in would be partially or fully insulated.
The other advantage of the Robo Global Robotics and Automation Index ETF is its diversification. As of April 9, it had stakes in 77 stocks, none of which was larger than 1.81% of invested assets. Nvidia is one of its 77 holdings, but it comprises only a 1.47% weighting.
The second-largest holding in this ETF, which happens to be one the top-performing robotics, automation, and AI companies over the long run, is Intuitive Surgical (ISRG -0.20%). Since the start of the century, Intuitive Surgical has installed more than 8,600 of its da Vinci surgical systems, which assist surgeons in a variety of soft tissue procedures. Intuitive is the clear market share leader in robotic-assisted surgical systems, and the growth runway for these systems extends as far as the eye can see.
The Robo Global Robotics and Automation Index ETF provide a smarter and safer path to profit from the AI revolution over the long run.
