Investing In AI Stocks

Investing In AI Stocks

Artificial intelligence has been a hot topic of discussion among investors for what seems to be forever now. However, the real advent of AI stocks and the use of artificial intelligence in business is still relatively new. With the exciting capabilities that this tech is bringing to the world, bringing the ability to revolutionize every industry on the planet, it is no surprise that the mere mention of artificial intelligence generates a buzz on the market. 

A number of high-profile names are engaged in the development of AI systems for internal use. Huge tech corporations, such as Alphabet, Amazon, Google, Microsoft, and IBM are actively trying to develop cutting-edge artificial intelligence that can simplify tasks, cut costs, and drive the company ahead of the competition. 

However, these companies are not strictly AI-focused and generate a bulk of their revenues and earnings from their primary products and services. As for companies working strictly on AI, there are still only a handful of them on the market. Developing artificial intelligence takes years to master and requires highly-skilled workers to be done right, making it tough for companies to sustain business operations over a few years without generating any revenue. 

"I think it's a pivotal moment [for AI], ChatGPT has shown that these big language models can do amazing things and the general public has suddenly caught on" - Geoffrey Hinton

Despite this, some stocks seem to be ahead of the curve and could prove to be very lucrative investments in the long run.

Why Should Investors Consider AI Stocks?

Before diving into individual AI stocks, it is important to consider why investing in artificial intelligence stocks could be a great idea for investors. A number of factors can determine the ultimate success or failure of an investment and investors should take the possible benefits of investing in AI into account, such as:

  • Growth - the AI market is still in its infancy, which leaves plenty of room for growth for existing and upcoming AI companies to seize considerable market share 
  • Improved efficiency and productivity - AI has the potential to streamline many business operations on the market, which can boost growth for companies across all sectors of the economy
  • Increased profitability - successful AI implementation can help companies cut costs, which is beneficial for their bottom line 
  • Diversification - for investors who already have substantial holdings in other stocks, investing in AI can be a great way to diversify their portfolios into a high-growth industry with a lot of potentials
  • Competitive advantage - companies that adopt AI technology earlier than others may have a window of opportunity to accelerate growth and gain a competitive advantage

AI Stocks You Can Invest In Right Now

As already mentioned, a number of high-profile companies have already started the adoption of AI technology. However, the stocks of companies that are solely engaged in AI solutions are few and far between. Companies, such as C3 AI, BigBear AI, SoundHound, and others, have the potential to reap massive benefits over the long run. 

The success of OpenAI’s ChatGPT was an important catalyst for AI stocks in 2023 - which surged between March and April of this year. Inc (NYSE:AI)

  • C3 AI was founded in 2009 by Thomas Siebel and provides enterprise AI software solutions to businesses across a broad range of industries, such as health care, energy, manufacturing, and financial services 
  • C3 AI operates on a software-as-a-service (SaaS) model, charging customers based on usage of its platform and applications
  • In 2016, C3 AI signed a multi-year agreement with the United States Department of Defense to provide AI-based predictive maintenance for aircraft systems
  • The company went public on the NYSE in 2020 - raising $650 million from proceeds
  • In 2021, C3 announced a partnership with Baker Hughes which involved creating an AI-powered energy technology joint venture, aimed at helping the energy industry reduce emissions 

C3 AI’s stock lost a bulk of its value after going public in 2020. As the company was still in its pre-revenue stage and the global markets were shaken up over the Covid-19 pandemic. 

However, 2023 marked an impressive rebound for the stock, thanks to the amazing success of OpenAI’s ChatGPT, which has over a hundred million users around the world. 

" I think is the world's leading provider of AI enterprise application software, if you think that that artificial intelligence is going to influence the enterprise in a big way then I think this represents a, just a staggeringly large addressable market opportunit" - Thomas Siebel

C3’s stock surged from $10 to $30 over the course of a month but has since shed half of its market value again. While the company is still relatively small and unprofitable, it does manage to grow revenues year after year, which is important for investors considering the stock as a long-term investment. 

c3 stock.png

Snowflake Inc (NYSE:SNOW)

  • Snowflake was founded in 2012 by former Oracle engineers Benoit Dageville and Thierry Cruanes and provides a cloud-based data warehousing platform that allows businesses to store, manage and analyze their data 
  • Snowflake’s platform is designed to support machine learning and AI-driven data applications 
  • Snowflake's revenue model is based on a consumption-based pricing model, where customers are charged based on the amount of data they store and the number of computing resources they consume
  • The company launched its now-popular cloud-based data warehousing platform in 2014
  • Snowflake went public on the New York Stock Exchange in 2020 - raising over $3 billion in proceeds 
  • In November 2020, Snowflake signed a strategic partnership agreement with Salesforce to implement Snowflake’s data warehousing platform

Snowflake’s IPO created a lot of buzz on the market in 2020, with even Berkshire Hathaway investing $735 million in the stock, which rose to over $400 after a $120 IPO. However, overly optimistic valuations and bearish market sentiment have caused the stock to crash down nearer to its IPO price in 2022. As of April 2023, the stock is trading within the $140-150 range - far from its 2020 highs. 

This necessary correction could mean that Snowflake is likely to win back the favor of some investors at a lower valuation, as the company has been able to boost its revenues considerably throughout the year. Still, the current $46 billion valuation is nowhere near Snowflake’s book value, which may mean that the stock could fall lower and present better buying opportunities in the near future. 

"..obviously our growth becomes more of a function of our scale because the the type of growth that we have is not just high, it's exceptionally high given the scale that we're already operating at" - Frank Slootman

snowflake stock.png Holdings Inc (NYSE:BBAI)

  • BigBear AI is a technology company that provides artificial intelligence solutions for a variety of industries. The company was founded in 2015 by former deputy assistant secretary of defense for research, Dr. Reggie Brothers
  • BigBear’s core business model involves leveraging AI and machine learning to help clients identify patterns, detect anomalies and make forecasts based on data 
  • In 2018, BigBear AI was awarded a contract by the United States Air Force to develop an AI platform to support the Air Force's Rapid Sustainment Office
  • BigBear AI had its IPO on the New York Stock Exchange on December 8, 2021, under the BBAI ticker 

BigBear AI went public using a SPAC, which was a very common method for innovative companies to go public between 2020-2022. However, most SPAC entries lost a lot of value soon after the IPO and BigBear was no exception. The stock fell from the $10 SPAC threshold to less than $1 within the space of a year. 

“Going public allows us to massively expand the path to a technology-first company that serves not just the federal government but also important commercial customers as well.” - Dr. Reggie Brothers

The success of ChatGPT also had an impact on BigBear’s stock, which surpassed $6 in February 2023. With the stock falling low once again, investors might find a good bargain here to hold for the long term. While still unprofitable, BigBear generated $40 million in revenue in Q4, which is a 20% increase YoY. 

bigbear ai stock.png

SoundHound AI Inc (NASDAQ:SOUN)

  • SoundHound AI was founded in 2005 and develops voice and sound recognition technologies for various industries, including automotive, consumer electronics, and music
  • The core business of the company revolves around licensing voice and sound recognition software to third-party companies so they can integrate it into their products/services
  • In 2009, the company launched its music recognition app, SoundHound, which quickly gained popularity among users
  • SoundHound AI launched the Houndify platform in 2015, which enables developers to create custom voice assistants and chatbots using their company’s voice recognition technology
  • SoundHound has struck key partnerships with the likes of Hyundai and Honda while receiving funding from the Mercedes-Benz Group (formerly Daimler AG)
  • SoundHound AI went public in August 2022 and trades on the Nasdaq, under the SOUN ticker

Since SoundHound AI is a relatively new company to list its shares, judging its stock performance might not paint a clear picture of the company. However, SoundHound did lose a lot of value and was down from its IPO price of $6.50 to $1 in January 2023. 

"So we are a voice AI company, we built the core technology in-house and that was very important to us as we wanted to own the technology so that we don't depend on other companies and also by owning it we could be disruptive, we could make the technology better than what whatever is available from alternatives" - Keyvan Mohajer

After ChatGPT’s success, SoundHound stock also rose above $4. Considering the quarterly revenues generated by the company (less than $10 million), it is safe to say that SoundHound is overvalued at a $620 million market capitalization. As a volatile stock, SoundHound could dip lower throughout 2023 - presenting new entry opportunities for investors. 

soundhound ai stock.png

IBM Common Stock (NYSE:IBM)

  • IBM has been one of the frontrunners among blue chip companies with regard to AI development and machine learning
  • The Watson Health unit was one of the biggest AI projects spun off by IBM, which was launched in 2015 and eventually sold off in 2022
  • IBM’s future plans for AI involve focusing on making AI as accessible to small businesses as possible, using its IBM Cloud Pak which allows businesses to build and deploy AI applications in a secure and scalable way
  • While AI is not the primary focus of IBM’s business model, the company has invested billions of dollars in AI projects to serve supply chains, healthcare, and financial services processes 
  • IBM is one of the largest companies currently engaged in AI development and a great option for investors who prefer something a bit more stable, profitable, and with a sizable dividend yield (5.06%)
ibm stock.png

AI ETFs To Invest In For The Future

For investors who would like to diversify their AI-related investments, there are a few convenient AI ETFs to choose from that invest in cutting-edge Ai and robotics companies from around the world. 

ARK Autonomous Technology & Robotics ETF (ARKQ)

  • ARKQ is an actively managed ETF from ARK Invest. The fund was launched in 2014 and invests in companies involved in the development of autonomous technology and robotics, such as autonomous transportation, electric vehicles, 3D printing, etc 
  • The fund has an expense ratio of 0.75% and some of its largest holdings include the likes of Tesla, Alphabet, and Baidu
  • The fund performed exceptionally well in 2021, but the 2022 bear market and rising interest rates have shredded its market value, due to the fact that many of its portfolio companies are in their early stages of development, as well as due to the general buzz surrounding technology stocks, which leads to overly optimistic valuations
  • The ETF also invests in private companies in the AI fields, which would otherwise be inaccessible to retail investors
arkq stock.png

ROBO Global Robotics And Automation Index ETF (ROBO)

  • The ROBO Global Robotics And Automation Index ETF, or ROBO for short, is an ETF that invests in companies involved in the development, production, and application of robotics, automation, and AI technologies
  • The ETF is passively managed and tracks the ROBO Global Robotics and Automation Index, which is comprised of over 80 companies from around the world, including both established players and emerging companies in the robotics and automation industries
  • Some key holdings of the ETF include the likes of NVIDIA, Intuitive Surgical, and Keyence
  • The ETF was launched in 2013 and performed admirably in 2021. However, the same factors that played into the fall of ARKQ can also be observed in the case of ROBO
robo stock.png

Key Takeaways From Investing In AI Stocks

  • Artificial intelligence is seen as one of the most important breakthroughs in the history of humanity, let alone in the world of business
  • Many high-profile companies are engaged in the AI and machine learning industry, such as Google, Amazon, Meta, Microsoft, IBM, etc.
  • Some smaller stocks, such as C3 AI, BigBear AI, SoundHound AI, etc. offer high growth prospects, but consequently, high volatility 
  • The release of OpenAI’s ChatGPT platform in 2023 has boosted AI stocks into year-long highs 
  • Most AI stocks are startups with limited revenues but plenty of funding from some of the biggest names on the market, which makes them very attractive for long-term investors with a higher risk tolerance 

FAQs On Investing In AI Stocks

Are AI stocks a good investment?

AI stocks can be rewarding investments in the long run, as the industry is a high-growth one, and adoption rates are expanding rapidly. Investors with an overall conservative portfolio could benefit from adding AI stocks into the mix. 

Do AI stocks pay dividends?

While some major players that also engage in AI development do pay dividends, most of the purely AI-focused companies are still young and unprofitable and dividends can be decades off - if ever paid. 

Why did AI stocks go up?

2023 started off well for AI stocks, as OpenAI’s ChatGPT was released to the public and quickly became very popular, which improved the sentiment towards AI stocks in general - driving up stock prices.