Artificial intelligence (AI) is hot right now, and it's everywhere, including the stock market. Nvidia and C3.ai, for example, both of whose businesses are centered around AI, are up nearly 200% so far this year.
It's hard to know how much of this is hype and how much of this is the result of far-reaching potential. One thing that's obvious is that they're both trading at high valuations. Nvidia stock trades at 213 times trailing-12-month earnings and 40 times trailing-12-month sales, while C3.ai trades at 14 times trailing-12-month sales and isn't profitable.
It can be very tempting to hop on the AI bandwagon, or any bandwagon that's creating the latest buzz, as prices soar and everyone around you says it's going to be the next big thing. But if you're one of the many people who don't really understand what Nvidia does, or how its GPUs work, it might be best to steer clear. Believe it or not, you can find winners in every industry that can ultimately provide the same long-term potential as whatever hot tech stock is in the headlines today. And you can also benefit from AI trends by finding great stocks you do know and understand that are using AI technology to up their game.
Why not jump on the AI train?
It's never a good idea to invest in companies you don't really understand, because if you don't understand what it does, it's unlikely you'll be able to evaluate whether it's a good investment. Today, there are so many resources for both novice and more experienced investors, and investors who can perform due diligence on their own can make successful investing decisions without having to fork over hefty fees to investment planners and advisors (although there are times for those, too). Gone are the days when you had to trust whatever your broker recommended without having a clue what the company did or why it was a good investment.
If microchips or technology is your thing, or you're willing to put in the time and effort to really get to know a high-tech or AI company, by all means, go ahead and do it. For average investors who don't have that time, or don't think they can get to a point of reasonably understanding it well enough to see what its potential is, I guarantee you can find something else you can feel more confident buying.
How to do it responsibly
You can also benefit from AI by buying stock in companies that you do understand. The new age of generative AI is what's capturing a lot of attention right now. But many of the companies that make services you use and products you consume have been using AI for decades.
One of the best examples is Amazon (AMZN -0.01%). If you're a satisfied Prime customer or have ordered from Amazon in the past, you've seen firsthand how Amazon offers a greater selection and faster shipping than probably anyone else in the U.S. It uses AI to speed up delivery times and offer you a targeted shopping experience.
It's also developing generative AI solutions for Amazon Web Services, and you can benefit from that while buying Amazon because of its e-commerce business.
Image source: Getty Images.
Another example is coffee giant Starbucks (SBUX 3.86%). If you frequent your local Starbucks coffee shop and enjoy the experience, that's already a reason to consider looking into it as an investment. You might not realize that Starbucks has heavily invested in AI to predict what drinks will be popular and to offer a customized digital experience on its app.
Amazon and Starbucks have also both beaten the market over time. There's a place in a portfolio for hot growth stocks and tech stocks, but very often, it's the companies you know and love that offer the best opportunities for gains.
