Best AI Investments

ChatGPT has taken the world by storm and gotten investors looking for the best AI investments. While OpenAI, which created ChatGPT, is a private company, Microsoft is its largest investor and will profit from OpenAI success going forward. Meanwhile, Nvidia stock has soared. They make the kinds of specialized computer chips used for generative AI which, in turn, is the generation of new text content and images. Besides ChatGPT, this sort of content is generated by Dall-E, and Bard, a Google app, as well as others. Where are the best AI investments going forward?

Investing in AI or AI Picks and Shovels

One of our favorite sayings in the realm of picking investments comes from the days of the California Gold Rush.

When everyone is digging for gold,

the best money is to be made selling picks and shovels.

Although Mark Twain is often cited as the author of this observation, it appears in many forms and probably emerged over time from generally shared wisdom. There is a point of this observation in regard to AI investments. Artificial intelligence applications like ChatGPT need the internet. The internet needs computers and servers. And these need computer chips, specialized chips. This gives an investor two avenues to explore in the evolving world of AI.

There are companies making money by helping generate internet content and even college theses. There are also applications like the one that helped find a new antibiotic for severe, drug-resistant infections. At the same time there are computer chip designers and manufactures building the infrastructure on which this new technology works. Which are better investments? Can you even make a good choice in this rapidly evolving new field?

Is Microsoft a Good AI Investment?

Microsoft invested $10 billion in OpenAI. Their deal gives them 75% of OpenAI profits until they get their $10 billion back. Then they have a 49% stake in ChatGPT going forward. Microsoft annual revenue is in excess of $160 billion a year. So, while the OpenAI investment is a nice cash cow, its significance is dwarfed by the scale of Microsoft’s total earnings. In other words, an investment in Microsoft is an investment in a huge and successful company but not really a targeted AI investment.

Is Nvidia a Good AI Investment?

Looking at Nvidia stock this year, one could assume that the company is an excellent AI investment based on the stock’s performance since late 2022. It is up three and a half times its value in October of 2022. However, it is up 21% from its previous peak value in November of 2021 when Fed interest rate increases hit the markets and drove the S&P 500 down as well. Thus, part of the Nvidia stock story has to do with interest rates and hopes for a market recovery as the Fed backs off rate increases. Nevertheless, there is less of an AI dilutional effect with Nvidia than with Microsoft as this is a chip maker at the heart of the AI boom. The question we have is how its current share price compares to its intrinsic stock value. Has the AI craze inflated its stock price or does it have room to grow based on the company’s and the AI market’s fundamentals?

Who Else Is in AI?

Alphabet (Google), Meta (Facebook), IBM, and Amazon are all working in AI and, like Microsoft, are likely to find profits. But, in each case these are big companies and have the same issue as Microsoft. They are not anywhere close to pure AI investments. The sort of company that could benefit from AI and has not already soared in stock price is someone like Alteryx. This is a software company whose products assist in analyzing data to provide advanced analytics for normal companies. Since we do not see this company currently benefiting from the AI stock price boom, their stock price is not inflated which gives an investor a comparatively cheap entry point in this niche. Obviously, this sort of investment will take some investigation to find pure AI plays that have not already gone up in price. Alternatively, one can always invest in AI ETFs and try to time the market, getting out when the current boom cools off.

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