Smart Selection

Artificial intelligence is experiencing its breakout year, dominating the headlines and the stock market. It could transform various industries and services far beyond the traditional tech firms.

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Artificial intelligence (AI) has the potential to significantly impact various sectors of the economy by transforming processes, enhancing efficiency, and introducing new opportunities. Companies are well aware of its capabilities and AI was mentioned over 1,000 times in Q2 2023 earnings calls by S&P 500 firms. In 2023 the stock market has seen a resurgence of the tech sector and those with AI initiatives have been major beneficiaries. 

AI has major automation, content creation, personalisation and generative design capabilities. Businesses that can rapidly and accurately harness these factors could gain an edge to increase productivity and profits. However, investors should be wary that not all will smoothly implement new technologies and the projects will come with costs ahead of potential future savings. 

Natural picks

There is a growing need for greater computational power and access to larger datasets for more complex AI models to improve their performance. This puts large tech companies in an advantageous position, as they can afford the high upfront costs and generate huge amounts of customer data. They're also able to take stakes in and acquire smaller, more specialised private companies.

Microsoft’s ($MSFT) partnership with ChatGPT parent company OpenAI has made it an obvious choice for investors who want to invest in the industry. Google ($GOOG) launched its Bard AI that responds based on current information on the internet as a competitor. A suite of AI models have been created by Amazon ($AMZN) as part of AWS and Meta ($META) has long integrated AI into its products, as well as releasing its large language model code online. 

Similarly, the hardware from chipmakers like Nvidia ($NVDA) and Advanced Micro Devices ($AMD) have enabled these models to run faster and more efficiently. These shares have recently rallied and are clear options for investors to gain exposure to the AI trend. Some might even worry whether there’s an AI bubble and if the sector could pull back later this year. 

Digital medicine

AI and machine learning (ML) are expected to cause major changes in the healthcare industry due to its vast multimodal datasets. They could help with the development of new drugs, generate synthetic data for unusual or expensive situations, automate administrative tasks and act as chatbots to aid diagnosis. Google’s Deepmind subsidiary solved a long standing challenge in biology relating to protein structure in 2022 and gives researchers access to the database to advance their efforts relating to various diseases. 

Regeneron Pharmaceuticals Inc ($REGN) is trying to speed up drug discoveries by combining the powers of automated laboratories, AI and cloud computing. It’s a good choice for investors hoping to profit from adding efficiency to the process that often takes many years, comes with high costs and has high failure rates. Medtronic ($MDT) has programmed robots to perform certain surgeries. Those who want to invest in a more diversified firm might consider GE Healthcare ($GEHC), whose Edison platform analyses how customers use their products and gives insights about improvements. 

Evolving content

AI can be used to automate content creation, personalise advertising and provide detailed insights about audiences. Image generators like OpenAi’s DALL-E and Midjourney are still private, but investors wanting exposure to the area should invest in public companies like Adobe ($ADBE). The software firm is incorporating AI generated images into Photoshop, which could function as a ‘co-pilot’ for graphic designers. This could greatly improve productivity and help designers push creative ideas even further. 

Consumer experiences could be further personalised as AI enables more targeted advertising. Netflix ($NFLX) was an early mover in the space with its recommender algorithms and using its own data as a guide for creating future shows. However, investors might want to wait to see whether subscriber numbers hold up in the medium term after price increases and a clamp down on password sharing. While investors wanting to invest in streamlining marketing workflows could find customer relationship management platform HubSpot Inc ($HUBS) a better choice. It has recently integrated AI tools into its offerings.

Threat detection

Generative AI could greatly impact the cybersecurity sector and provide new tools for both attackers and defenders that make determining the accuracy of information harder than ever. Even OpenAi has pledged funds towards security initiatives. It could help companies check significant amounts of data, do continuous threat monitoring, help identify false positives and strengthen both internal and external controls. Most firms are expected to implement some kind of security measures, so investors might want to consider some providers of solutions in the area. 

For example, the end-to-end enterprise development platform ($AI) offers businesses a menu of AI services. These can be quickly deployed to automate processes and detect fraudulent actions. CrowdStrike ($CRWD) has used Amazon’s Bedrock platform to accelerate the development of a virtual security analyst known as Charlotte AI. However, despite contracts with the U.S. Department of Defense and a successful earnings report the firm hasn’t always been rewarded in the stock market. Investors might also want to invest in Fortinet ($FTNT), which has long deployed AI technology and focuses on the data centre market.  

Autonomous fleets

AI is particularly good at optimising resources, providing predictive analytics and rapid information feedback. These capabilities make it very useful for warehouse administration and automation, self-driving vehicles, traffic management, as well as generally improving efficiencies in logistics. Firms like GXO Logistics ($GXO) have created specialised supply chain solutions for e-commerce businesses involving automation through robots and analytics to manage inventory. Investors who want exposure to earlier stage ventures should invest in FedEx ($FDX), which is launching an innovation lab to collaborate with startups in India. 

Software has also become increasingly important to the car industry, with various automated features helping to enhance safety. While fully autonomous vehicles are unlikely to take over the roads in the near future, many car manufacturers have integrated some aspects of technology driver assistance. Even major traditional firms like General Motors ($GM) have a Cruise Division working on self-driving cars. Others like Xpeng ($XPEV) are considered to rival Tesla ($TLSA) in terms of EVs and autonomous driving technology. 

Sector trends

For those wanting a more general exposure to the AI trend, Nasdaq focused ETFs like $QQQ provide a simple way to invest in the large U.S. tech firms. ETFs that specifically target the subsector tend to combine AI and robotics. There’s a notable number of Japanese businesses in the area that may not be accessible for those trading on New Zealand, Australia and U.S. exchanges in the following ETFs. 

The Global X Robotics & Artificial Intelligence ETF ($BOTZ) has 44 holdings that work with industrial robotics, automation, non-industrial robots, and autonomous vehicles. The ROBO Global Robotics & Automation ETF ($ROBO) is for investors who want to add cloud computing to the mix and limit the risk of single companies. This ETF restricts exposure to each of its 80 holdings to 2.2% of the total. 

Similarly the iShares Robotics and Artificial Intelligence Multi Sector ETF ($IRBO) tracks an equal-weighted index of 117 firms across developed and emerging markets. The ARK Autonomous Tech & Robotics ETF ($ARKQ) is an actively managed option that also includes opportunities in the 3D printing, space exploration, and the energy industries. With the holdings of these ETFs available online, they should be another good starting point for investors wanting exposure to AI stocks. 


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