Op-ed: Here’s where investors should be looking when betting on the artificial intelligence boom

The rise of ChatGPT has sparked another national conversation about artificial intelligence.

Depending on your viewpoint, the bot is either the key to making a host of companies and their workers more efficient, or it’s a slippery slope toward robots eventually taking over society, leaving millions jobless.

While the truth probably lies somewhere in the middle, what is clear is that all the big tech companies think AI will be a huge profit driver in the years ahead.

That has poured more fuel on an arms race that has been going on for years in AI. (Remember when everyone started to pour billions into driverless car technology?)

Naturally, investors are thinking about who will come out ahead. It may seem like a sure bet that it will be one or a combination of Amazon, Alphabet, Facebook and Microsoft, each of which has nearly limitless resources to spend. But it’s hard to know for sure.

History is littered with examples of companies that once enjoyed a dominant position in an industry, only for them to slack off and become forever weakened. Yahoo! at one time was synonymous with the internet, ruling search. Now it has a little over 1% of that market.

BlackBerry was a status symbol as recently as 2010, when it was the top smartphone platform. Today, the device is barely functional after the company shut off a host of services last year.

This is partly why investing in AI could be a classic pick-and-shovel play. Not only are Amazon, Alphabet, Facebook and Microsoft all mature companies, but there’s no guarantee any of them will become the undisputed king of AI.

Therefore, the safer bets could be on the companies that will help make that a reality, regardless of who wins the AI arms race. At the same time, it’s probably best to wait for a better opportunity to jump in because anyone going headlong into AI now will pay a steep price.

The largest cloud service providers, or hyper-scalers, today each have millions of servers in data centers scattered across the country. The portion of those servers running AI workloads — including powering a chatbot, a chess-playing machine, a driverless car and everything in between — will need to go through a massive upgrade cycle to add capacity.

Investors have taken notice.

The iShares Semiconductor ETF — a collection of the 30 largest U.S. listed companies involved in producing memory chips, microprocessors, integrated circuits and related equipment — is up about 23% year-to-date. If you drill down further, a couple companies within that fund have done even better.

Nvidia has gained more than 80%, while Advanced Micro Devices, Inc. has advanced by more than 50%. Together, these firms control about 29% of the graphics processing unit market. GPUs are essential for AI because they help to process massive amounts of data.

Meanwhile, Arista Networks has climbed over 30% this year. The company produces network switches for large data centers that enable connectivity between devices in a network. It enjoys about a 10% share of that market.

These are all great companies, and it’s hard to see the AI revolution moving forward without them. Still, making a case for any of them at their current valuations is nearly impossible. Yet, in a classic case of bad news is good news, they could become more attractive later this year.

The banking industry has thus far averted disaster, with contagion fears associated with the closure of Silicon Valley Bank and Signature Bank — as well as the issues related to Credit Suisse — having dissipated in recent days. Even so, it’s reasonable to expect tighter loan conditions in the near term across the banking sector.

That could stifle personal consumption and business investment, pushing an economy already struggling with higher interest rates and elevated inflation over the edge. That would put pressure on stocks, leading to broad-based declines.

While that wouldn’t be a great development overall, it may provide an opportunity to make the best of a bad situation by adding AI exposure — including the likes of Nvidia, AMD and Arista Networks.  

— By Andrew Graham, founder and managing partner of Jackson Square Capital