What happened
A broad cross-section of the market has been steadily gaining ground over the past week, and the positive sentiment spilled over into Monday. Market participants are hopeful for an agreement in the current debt ceiling negotiations, and an end to the stalemate in Washington, D.C., could further boost stocks.
Another area of intense focus is recent advancements in artificial intelligence (AI) and how investors can best benefit from this rapidly emerging technology. One of Wall Street's biggest investment banks released estimates regarding the ongoing impact of AI, and the sheer magnitude of the numbers had investors beating the bushes for buys in the sector.
With that as a backdrop, Meta Platforms (META -0.00%) rose 2.1%, C3.ai (AI 1.01%) jumped 9%, and Upstart Holdings (UPST 1.77%) surged 17.2%, as of 12:58 p.m. ET on Monday.
Image source: Getty Images.
A check of all the usual sources -- earnings results, regulatory filings, and changes to analysts' price targets -- turned up little in the way of company-specific news driving these AI stocks higher. This seems to suggest that the majority of investors are focusing on how best to profit from this disruptive technology.
So what
Economists at Goldman Sachs have run the numbers regarding the potential economic gains from advancements in AI -- and the conclusion it reached is startling.
Generative AI -- the technology behind viral chatbots including ChatGPT and Alphabet's Bard AI -- could increase output in the U.S. by 1.5% on average every year over the coming decade.
History suggests this could have a positive economic impact, particularly for those businesses that adopt the technology, boosting profits. Goldman Sachs analysts estimate that this increase in earnings will lift the broader market, increasing net profits margins for the S&P 500 by 4% over the next 10 years.
The one piece of company-specific news that emerged was decidedly negative, which adds further weight to the theory that investors are increasingly enthusiastic about the potential for AI.
Reports emerged this morning that Meta Platforms had been fined a record-breaking 1.2 billion euros (roughly $1.3 billion) by government regulators in the European Union (EU) for violating privacy laws and transferring user data to servers in the U.S. The ruling was curious, since U.S. and EU regulators are in the midst of negotiating a data-sharing deal that would make the ruling moot. Investors seemed to take the ruling in stride, particularly given the ongoing talks and Meta's vow to appeal the decision.
Data by YCharts
Now what
It's easy to see why investors are intrigued by recent advances in generative AI and the potential it represents, but be wary of getting caught up in the hype. It's still early days for the technology, and it's yet unclear as to who the ultimate winners will be. A quick look at the chart suggests that investors might be getting carried away, particularly in view of the fact that each of these stocks has gained more than 100% (as of this writing) in 2023 alone.
How will these companies benefit from advances in AI?
- Upstart Holdings is a fintech company using AI to disrupt the consumer lending industry, using its advanced algorithms to better identify consumers most likely to pay back loans.
- C3.ai offers solutions that help enterprise-level businesses get AI applications up and running quickly.
- Meta Platforms uses AI to help surface relevant content for users of its social media platform, while also relying on the technology for targeted advertising, among other uses.
Investors should keep in mind that both C3.ai and Upstart are both unprofitable and burning cash, which makes them riskier investments. Furthermore, all three stocks sport valuations that simply won't be for everyone. C3.ai, Meta Platforms, and Upstart are currently selling for 11 times, 6 times, and 4 times sales, when a reasonable price-to-sales ratio is between 1 and 2.
Given its history, Meta Platforms is the clearest buy among the three, as its digital advertising business is on the rebound, and its fortunes with it.
There's little question that AI represents a vast, largely untapped opportunity. It's still too early to tell who the ultimate winners will be, so investors should make AI stocks an appropriate part of a well-diversified portfolio.
