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Artificial intelligence (AI) may be the hottest thing since the proliferation of the internet, but it has a long way to go to become a mature innovation.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
Roughly three decades ago, the proliferation of the internet changed the growth trajectory of corporate America forever. Though numerous new innovations, technologies, and popular trends have come and gone since the internet became mainstream, nothing has come close to changing the growth arc for businesses... until now.
The rise of artificial intelligence (AI) has absolutely lit a fire under Wall Street. The Dow Jones Industrial Average, S&P 500, and Nasdaq Composite have all recently galloped to record-closing highs, with the AI revolution doing a lot of the heavy lifting.
Image source: Getty Images.
With AI, software and systems are given responsibilities that would normally be assigned to humans. The key being that these systems have the capacity to learn and evolve over time without human intervention. The ability to become more proficient at tasks over time, or perhaps even learn new skills, is what gives AI broad-reaching utility and has investors seeing big dollar signs.
As of the closing bell on June 21, five of my 42 stock holdings were highly innovative, industry-leading artificial intelligence stocks (listed in no particular order): Amazon (AMZN +0.01%), Alphabet (GOOGL +0.02%)(GOOG +0.02%), Meta Platforms (META +0.01%), Baidu (BIDU +0.01%), and Intuitive Surgical (ISRG +0.01%).
While the buzz surrounding AI has pushed all but Baidu higher, I have a rather blunt confession to make. My investment thesis for all five of these top-tier companies has absolutely nothing to do with artificial intelligence.
AMZN data by YCharts. The author owns the Class A shares of Alphabet (GOOGL), thus why the return of the Class C shares (GOOG) has been excluded.
If artificial intelligence turns into a key cash-flow driver for Amazon, Alphabet, Meta Platforms, Baidu, and Intuitive Surgical, it would be fantastic. However, the primary reason I bought into each and every one of these businesses is because they possess seemingly impenetrable moats in one or more respective industries.
While it's fair to say that I bought into each of these businesses before AI was the buzzy innovation is it today, it's not the catalyst that keeps me holding onto shares of Amazon, Alphabet, Meta, Baidu, and Intuitive Surgical.
Image source: Getty Images.
Truth be told, I'm a big believer that history tends to rhyme on Wall Street. We might not see things happen precisely the same way or within the same time frame, but history can absolutely act as a teacher for investors.
For instance, history tells us that long-term-minded investors tend to be successful on Wall Street. There hasn't been a single rolling 20-year period in the S&P 500 for more than a century (when back-tested) that didn't generate a positive total return, including dividends, for investors.
On the other hand, history hasn't been all too kind to next-big-thing innovations, technologies, and trends. Although it's impossible to predict when the hottest thing on Wall Street will run out of steam, there hasn't been a next-big-thing trend in 30 years that's avoided an early stage bubble-bursting event. All innovations need time to mature, just as businesses need a game plan for how to use these new technologies to grow their sales and profits. As of now, artificial intelligence isn't close to being a mature technology.
AI leader Nvidia (NVDA 0.01%) is providing all the evidence I need that history appears poised to rhyme, once more.
On the surface, Nvidia has been kicking tail and taking names. Its H100 graphics processing unit (GPU) has quickly become the most sought-after GPU for businesses operating AI-accelerated data centers. According to analysis firm TechInsights, Nvidia was responsible for 98% of the 3.85 million AI-GPUs shipped in 2023. Thanks to its first-mover advantages in AI, Nvidia's stock gained up to $3 trillion in market value in less than 18 months and briefly surpassed Microsoft and Apple to become the largest publicly traded company by market cap.
The problem is that we've never witnessed a company of Nvidia's size scale this quickly. The last time a market-leading business traded at close to 40 times trailing-12-month sales happened prior to the dot-com bubble bursting with Cisco Systems and Amazon. Both companies eventually pulled back by 90% from their respective dot-com bubble highs.
Additionally, Nvidia can lose even if its GPUs hold onto their computing advantages. A lack of available AI-GPU supply means businesses are more likely to turn to Nvidia's rivals to fulfill their needs. Likewise, Nvidia's top customers, which include Amazon, Alphabet, Meta, and Microsoft (not in this order), are developing their own AI-GPUs. This suggests a clear desire to lessen their reliance on Nvidia's technology.
All signs point to an AI bubble that's eventually going to burst. While AI can absolutely be a long-term game-changer, businesses first have to figure out how they're going to utilize the technology. Until this maturation process takes place, AI isn't going to play much of a role in my investment theses.