Artificial intelligence (AI) has been center stage for the past few years and has driven recent gains in the stock market. Eight out of the nine most valuable companies in the world are directly or indirectly investing in AI programs, and these companies also account for a large amount of the S&P 500, which is a weighted index. Although the index has 504 components at the moment, more than 30% is in information technology stocks. Apple, Microsoft, Nvidia (NVDA +0.64%), Amazon, and Meta Platforms are the five largest components.
That means even if you're completely invested in the S&P 500, with no further diversification, you are well exposed to trends in AI.
Many investors have taken that a step further and are invested in single stocks that create or harness generative AI technology. Nvidia and Palantir are two examples of AI stocks that have soared over the past two years -- 500% and 1,200%, respectively -- and investors who were prescient enough to see their potential have benefited enormously. But as AI stocks balloon in value, are investors putting too much confidence in their chances?
Investors see a huge opportunity in AI, and the repercussions of the advent of generative AI could far exceed what anyone thinks today. Bain & Company estimates an addressable market of nearly $1 trillion by 2027, but when you consider how generative AI, and specifically agentic AI, can take over many of the processes that people take care of today, it could be worth trillions to businesses.
However, since it's so new and still in the development phase, it's complicated to make any real guesses as to where it's going to go. DeepSeek's introduction made a splash last week precisely because no one was expecting it.
Does DeepSeek poke a hole into the AI investment thesis? Let's see why it could and how investors should react.
The latest and greatest
AI is the latest trend to capture market attention, but it's hardly the first. Investors tend to jump on the bandwagon when a new trend becomes popular and entices them with the prospect of making easy millions. Remember non-fungible tokens (NFT)?
Many words have already been written about how AI could change the world. DeepSeek didn't come out of nowhere last week, but it could compete with or even surpass ChatGPT and similar generative AI apps at a supposedly lower cost. This news demonstrated that AI is changing fast. The future may be bright, but it's unclear.
DeepSeek and what it represents may make AI more prevalent in usage, but it could also make it much cheaper to run. AI could still play a huge role in business and the economy, but since it's all still unknown, investors should be very careful about allocating too much of their funds to AI stocks. I don't recommend staying away altogether. By all means, determine which AI stocks are excellent businesses that fit your investment thesis and needs, and invest prudently.
NASDAQ: NVDA
Key Data Points
A lot of the discussion over the past week has been regarding Nvidia. Nvidia designs the chips that make generative AI work, and the companies developing the most competitive and useful large language models (LLMS) need Nvidia's most expensive chips to train their data. DeepSeek only has access to some of Nvidia's older and less expensive chips and was still able to produce a competitive product -- or so it says.
Nvidia stock fell after the news and remains down 16%. Yet, CEO Jensen Huang released a statement saying that "DeepSeek is an excellent AI advancement," and most of the investing community hasn't fallen out of love with Nvidia. It's still the leader in the space and has many products that drive innovation in AI and other industries. Huang's confidence is well placed even if DeepSeek's contention is true. So, the dip in Nvidia's price could be the opportunity investors have been waiting for. Revenue increased 94% year over year in the third quarter, and profit margins are still expanding. It's still driving incredible momentum in AI across platforms and regions, and shows no signs of slowing down.
A better way to invest in AI
Whether you invest in Nvidia or any other single AI stock, it should be one piece of a much broader investment strategy. In fact, investors who were lucky enough to buy Nvidia stock before it recently took off might have already sold some of their stock before the dip last week to make sure their fund allocation matches their investment strategy.
If you're looking for a safer way to invest in AI, you might want to consider investing in an exchange-traded fund (ETF) like the Invesco QQQ ETF (QQQ 0.01%) or the Vanguard Information Technology ETF (VGT +0.42%). Both of these ETFs offer broad exposure to trends in technology, which today are highly associated with AI. But they also provide greater security because they're diversified among a large assortment of stocks -- 100 for the Invesco ETF, which tracks the Nasdaq-100, and 316 for the Vanguard ETF. They have also outperformed the S&P 500 over many years. And most importantly, make sure your AI positions are only a component of a fully diversified portfolio that includes a broad range of categories.
