Investing in AI: why diversification goes beyond Nvidia & Co.
Investment hypes come and go. From 3D printing to the metaverse, and blockchain to NFTs, some trends never really break through. But others rapidly establish themselves. Artificial intelligence (AI) undeniably belongs to the latter category. Still, savvy investors would be well advised to look beyond classic AI stocks like the Magnificent Seven. An exploration.
Every investor looks for the highest possible return with the lowest possible risk. Traditional success factors here are momentum, quality, growth, value, market capitalisation and low volatility.
'In the last two years, AI in particular has been riding the crest of a wave of momentum, quality and growth. And the stocks that have benefited from that trend have mainly been the US tech giants’, says Joris Franck, Portfolio Manager at KBC Asset Management.
'They dominate the AI landscape and have already provided investors with handsome share price gains. Nvidia in particular takes the crown with a share price explosion of over 1000% in two years. But the question is, how long can they sustain this growth? Investors looking only at the Magnificent Seven will miss out on other opportunities.'
Are the promises of the AI giants solid enough?
Diversification is essential in investing, and investing in seven stocks within one theme offers decidedly too little diversification. 'Especially since these seven are already strongly represented in generic indices and portfolios. Together, they make up no less than a third of the S&P 500,' explains Tom Simonts, Senior Financial Economist at KBC Group.
'Moreover, these companies are currently burning through billions on AI developments; Microsoft, Amazon, Alphabet and Meta alone together invest 200 billion USD a year. So far, however, this has barely yielded any measurable returns. So the question remains: when will these investments pay off? Or might that never happen at all? As yet, there is no clear-cut answer to that,' Simonts says. Growth often turns out to be slower than initially predicted, especially with disruptive technologies.
'These companies have already experienced substantial share price appreciation, and high expectations mean they can’t afford many slip-ups', Simonts continues. 'Additional concerns are the critical questions about their monopoly position and the many lawsuits coming their way.'
Potential AI champions out of the spotlight
Although the Magnificent Seven are leading the AI revolution, we believe the greatest potential lies in the following pack.
Joris Franck, Portfolio Manager at KBC Asset Management
'Although the Magnificent Seven are leading the AI revolution, we believe the greatest potential lies in the following pack’, Franck states. 'This is where we find companies that benefit from AI developments, but with attractive valuations and without the heavy investment burden of the tech giants. The real winners of AI may be companies that are not directly involved in developing AI models, but that are building the AI applications, as well as providing the infrastructure and support that is essential for the further growth of this technology.'
Examples of companies capitalising on this trend
● Software companies: ServiceNow and Salesforce, for example, have already developed AI agents that help companies with automation. These AI agents can take over repetitive tasks, make decisions based on data, and make processes more efficient.
● IT services: Not every company has the expertise to develop or integrate AI applications. IT service providers such as Accenture provide that expertise.
● Other semiconductor companies: Although Nvidia is the best-known player in this field, there are other players such as Broadcom and Marvell that are also benefiting from the growing demand for AI data centre chips.
● Semiconductor equipment manufacturers: AI applications require advanced manufacturing equipment, and companies like ASML play a crucial role here.
● Hardware vendors: Large data centres and AI infrastructure need servers and storage. Dell not only make laptops, but also servers that power AI data centres.
● Energy producers: AI data centres consume huge amounts of energy, creating an opportunity for power producers.
Seek and ye shall find!
It's not too late to jump on the AI train, but it might be advisable to change carriages.
Tom Simonts, Senior Financial Economist at KBC Group
AI will undoubtedly impact all sectors and everyone over time. From the winegrower in France who uses AI for the early detection of diseases in his vineyards, to the car manufacturer in Japan using AI to develop self-driving technologies.
'While the Magnificent Seven play an important role in the AI revolution, it is crucial for investors to look beyond these usual suspects and diversify. It's not too late to jump on the AI train, but it might be advisable to change carriages’, Tom Simonts concludes. 'And as always: invest with knowledge, get good advice and think long term. The AI revolution has only just begun, and it may be that the real winners have yet to be discovered.'
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The information contained in this publication is for information purposes only and should not be considered as investment advice.
