How to play the latest A.I. trend on Wall Street
The investor community can’t seem to stop talking about artificial intelligence and what it means for the future of the world since ChatGPT’s revolutionary launch in late November. The conversational chatbot has created a tidal wave of excitement in the tech world for its ability to hold a conversation with users. Its introduction to the tech scene provoked Alphabet, Baidu, and even Alibaba to launch their own chatbots, while investors frenzy to find the next big AI contender. In the weeks since ChatGPT’s debut, every artificial intelligence-related investment or company has been on the rise, including ETFs with AI or a variation of the word in their name. It has inspired tech giants like Meta Platforms and industry giants like Caterpillar to highlight their own AI use cases during recent phone calls. But not every company with AI in its title or a stake in the race is worth investors’ hard-earned cash. “Some of these stocks are ripe for shorting because they’re really playing on myth and not enough reality,” said Paul Meeks, portfolio manager at Independent Solutions Wealth Management. “I think the leaders in AI are going to be some of these existing big companies, and not necessarily the upstarts.” CNBC Pro spoke to big investors who said those who want to play the lively trend should consider, by name larger market capitalization and already profitable companies to stay in the game with a stake. To say that Google is falling behind is a “mistake”. Parking money at both Alphabet and Microsoft could be one of the best ways to take advantage of the latest AI trend, at least in the short term, say big investors. Since ChatGPT’s launch last year, Microsoft seems to have dominated the AI conversation, with the investment community praising its multi-billion dollar investment in the chatbot maker and its plans to bring more features to its Bing search engine. In an interview with CNBC earlier this month, Microsoft CEO Satya Nadella called AI-powered search one of the biggest developments for the company since the advent of the cloud. “It’s a new day in the quest,” Nadella said during an AI event at Microsoft headquarters. Given these recent developments, many investors are recommending holding Microsoft for the long term, including Sid Choraria, a portfolio manager at SC Asia. Microsoft’s AI developments and the reported bug of Google’s chatbot during a promotional video have fueled concerns over the past few weeks that Alphabet could be losing the AI war. Shares of the Google parent company are up just 1% for the year and are down 9.8% in February. Microsoft is up 3.9% and 0.6% over the same period. But those concerns and the recent sell-off appear overdone, according to Robert Bierig, partner and portfolio manager at Harris Associates. “Keep your focus on Alphabet,” he said, adding that further AI developments should create additional revenue opportunities. “It’s our largest holding and we believe this sell-off has created a buying opportunity.” Like Bierig, Deepwater Asset Management’s Gene Munster says investors should stay with Alphabet for the long term, and the company’s long AI history and investments should deliver long-term returns. Alphabet has dedicated research and development resources to AI and machine learning for years, releasing products like its language model for conversational applications and BERT, a tool that better understands users’ search intent. “This has been a decades-long trend, and I think it’s a mistake to predict that Google is already at a disadvantage to Microsoft,” Munster said. Like Munster and Bierig, Meeks said investors “unfairly criticized” Alphabet. He named the tech giant one of the best value stocks right now, and viewed ongoing lawsuits and Bard’s glitches as only temporary issues. The retreat in shares also brings Alphabet in line with the S&P 500, which trades at a trailing price-to-earnings ratio of about 19 times despite better revenue growth and profitability than the average company, Meeks said. “When we come out in a year, two, three years, whenever AI really takes off, Alphabet will be there, bigger than everyone else in the room or as big as everyone else,” he said. Outside of FAANG stocks, Alphabet and Microsoft appear to be the dominant players and beneficiaries of the recent AI push, but big investors also see value in a few chip and e-commerce names that are driving these developments — or benefiting from them. Though Nvidia trades at a staggering PE of around 134, Meeks sees value in owning some stocks as its GPUs fuel the AI computing load. Choraria also views Nvidia’s hardware infrastructure capabilities as an AI positioning tool. Shares of Nvidia are up about 9% this week after the company beat fourth-quarter earnings expectations and shared a bullish outlook on AI. Outside of chip stocks, Choraria expects e-commerce company Alibaba to benefit from the AI push. He named the platform, which recently said it is working on its own ChatGPT rival, one of the best ways to play AI in e-commerce and China. Integrating an AI tool into Alibaba’s business and generating more AI content should improve efficiency and boost advertising effectiveness, he added. “New technologies like generative AI and [virtual reality] will drive demand for computing power exponentially,” added Choraria. “As a leading cloud provider, the opportunity remains strong for Alibaba.” C3.ai and BigBear.ai, for example, rose about 100% and nearly 368%, respectively, in 2023 after plummeting 64% and 88%, respectively, in 2022. Robots have also seen stocks rise, including the Global X Robotics & Artificial Intelligence fund, which is up 13% this year. But not every AI stock is worth investors’ hard-earned money, said Meeks, who recommends shorting companies and recommending shorting unprofitable companies and zero cash flow generation and going long Nvidia instead, Alphabet and Microsoft. Munster also advises investors to look for companies with some “measurable revenue growth,” such as those that expect revenue growth of even more than 50% this year w Henne, which operates from a small base. “If they don’t get a 50% increase in sales this year, it’s still a science project,” Munster said. “It might work out in the end and be a great result, but I think the majority of them probably won’t have great results.”