If there's one trend that defined 2023 and could define the entire decade, it's artificial intelligence (AI). Practically every company is spending on ways to build and implement AI into their products. And while any business stands to benefit from the advancements being made in AI, some stand to benefit more than others.
Nvidia, for example, is riding a massive wave of demand for its graphics processing units (GPUs), which many developers use to train their AI models. But you don't have to pick the next Nvidia to capitalize on the rapid growth in AI. In fact, you may be better off not doing so.
Picking a winner in an area with such wide-ranging technology and many competing forces is no easy task. And if a company's future relies on them outmaneuvering everyone else when it comes to facilitating AI, you could be looking at an all-or-nothing investment. Here's what to do instead.
Image source: Getty Images.
Build a basket of smart AI investments
If you invest in a wide-ranging basket of stocks, all with plenty of upside potential from advancements in AI, you're sure to have a few winners. You'll also have a few losers, but if you believe AI is a transformational technology that could generate trillions in economic value, the winners will surely outweigh the losers.
You can take some big risks if you size them right. Don't put too much into a single company with a make-or-break AI product. Even if they have promising technology, another company could come along tomorrow with an innovation that blows them out of the water.
Companies that stand to benefit if their technology is used to advance AI but aren't reliant on any single company or product can serve as a great core to your AI basket of stocks. These are the companies offering platforms and services that provide the backbone of advancements in AI. What's more, their businesses won't be brought to their knees if a new AI technology doesn't work out in their favor.
Instead of the chipmaker building the next AI chip that could end up in an enterprise's data center, invest in the data centers or the chip foundry. Take a look at Digital Realty or Taiwan Semiconductor. Or look at the major public cloud providers: Microsoft, Amazon, and Alphabet's Google.
Consider companies advancing AI that have asymmetrical upside with limited downside. Meta Platforms, for example, is one of the biggest AI innovators. It could one day provide the underlying technology for many AI products. In the meantime, it's using its AI innovations to drive real revenue results for its shareholders by incorporating its technology throughout its products. Having a built-in customer (itself) for AI products and spending puts it in a much stronger position to innovate.
You don't have to build the basket yourself
If you don't want to build a basket of stocks yourself, several exchange-traded funds (ETFs) focus specifically on AI and robotics. One of the newest entries with a bigger focus on AI is the WisdomTree Artificial Intelligence and Innovation Fund (WTAI 2.08%).
The fund invests in companies offering AI technologies or contributing to the development and deployment of AI innovations. It'll give you exposure to the AI megatrend for a small fee of just 0.45% of assets -- its expense ratio. Some of its most recent top holdings include:
- Naver: The Korean conglomerate that operates its eponymous search engine, popular messaging/social media app Line, and its cloud computing service.
- Alphabet: The parent company of the Google search engine and web services and Google cloud computing service. It's also developing its own AI large language model (LLM).
- Meta Platforms: The parent company of Facebook, Instagram, and messaging services Messenger and WhatsApp. It's also developing its own LLM and using it in its products.
- Microsoft: Operates the Azure cloud computing service and code repository service GitHub. It controls a 49% stake in leading AI developer OpenAI. It's also a leading PC operating system and enterprise software developer (in case you forgot).
- Arm Holdings: The company advancing chip architecture used by leading chip designers. Everyone from Nvidia to the big tech companies uses Arm's architecture for their AI chip designs.
There are about 75 additional holdings in the portfolio, none of which are weighted much more heavily than about 2%.
Maintain a long-term outlook on AI
It's easy to chase the most recent AI winners, but building a portfolio of companies that stand to benefit from advancement in AI (both from their own innovations and others) is one of the best ways to ensure you get a lot of the upside while limiting your downside. Many AI stocks have astronomical valuations, making them precarious investments these days. One earnings miss, one product delay, or one new competitor could wipe out the stock.
If you focus on companies with real competitive advantages building products and services to support the growth of AI, taking advantage of their own innovations, or both, you'll have a strong portfolio built for the future.
