Key Takeaways:
- The introduction of ChatGPT in November 2022 has made AI the norm, with the "Magnificent Seven" (Mag 7) stocks, including Nvidia, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla, worth around $20 trillion, up threefold from $7 trillion less than three years ago.
- Stock market professionals are divided on the prospects of AI-related stocks, with some seeing a bubble and others believing the surge is not yet in a bubble.
- The growth of AI needs three things: data centers, new electricity sources, and enhanced software, and companies are investing heavily in these areas.
- The use of AI promises massive positive changes in the global economy, including a more efficient workforce, reduced production costs, and increased profits.
- However, some AI-related corporations are engaged in a circular investment scheme, and a global chip shortage is increasing the cost of AI deployment.
Introduction to AI in the Workplace and Home
The use of new technology in the workplace and at home is nothing new, but the introduction of ChatGPT, a generative artificial intelligence service, in November 2022 has made AI the norm, and at a breakneck speed. As Brian Glenn, chief investment officer at private wealth adviser Premier Path Wealth Partners, notes, "If everyone is talking about a bubble, it probably isn’t." This surge in AI-related stocks has led to the "Magnificent Seven" (Mag 7) stocks, including Nvidia, Alphabet, Amazon, Apple, Meta Platforms, Microsoft, and Tesla, being worth around $20 trillion, up threefold from $7 trillion less than three years ago.
The Prospects of AI-Related Stocks
Stock market professionals are divided on the prospects of AI-related stocks, with some seeing a bubble and others believing the surge is not yet in a bubble. Terry Sandven, chief equity strategist at US Bank, says, "Inflation is stable, interest rates are stable and with a downward bias, and earnings are trending higher. It supports a higher valuation." However, as the late Sir John Templeton famously said, "this time it’s different" are the "four most dangerous words in investing." Wall Street veteran Art Cashin also notes, "No one rings a bell at the top of the market."
The Growth of AI
The growth of AI needs three things: data centers, new electricity sources, and enhanced software. Ethan Mollick, a University of Pennsylvania professor at The Wharton School and co-director of the Generative AI Lab, says, "You need a 10-times increase in computing power to get a linear increase in performance." This is why large-scale AI deployment needs lots of investment money. Sandven notes, "The rate of change in our society is getting faster, and it will never slow again largely because of tech. We are in the early innings in the building, and fast is getting faster."
The Impact of AI on the Economy
The use of AI promises massive positive changes in the global economy, including a more efficient workforce, reduced production costs, and increased profits. As Sandven says, "The world with AI will speed up permanently." Companies betting on AI are happy to spend, and increased investment will keep many businesses and their employees busy while a new infrastructure gets built. This will benefit the United States economy, at least for a few years.
The Buyers and Sellers of AI Stocks
The largest buyers of the Mag 7 stocks are money management companies that dominate passive investment products, such as exchange-traded funds. Money managers Vanguard, BlackRock, State Street, Fidelity, and J.P. Morgan collectively have approximately $36 trillion under management, or about half the value of the S&P 500’s market cap. However, some investors are opting to reduce their exposure to tech companies, and money managers may short-sell some Mag 7 stocks or use financial derivatives to do a similar job.
Challenges Facing AI-Related Corporations
However, some of the major AI-related corporations are engaged in a circular investment scheme, says Ted Mortonson, Baird’s managing director of technology and a veteran of tech growth. For instance, Oracle is spending tens of billions of dollars on Nvidia chips, while OpenAI inks a $300 billion cloud deal with Oracle. Meanwhile, OpenAI is deploying 6 gigawatts of AMD graphics processing units, while AMD grants OpenAI an option to buy 160 million shares. A global chip shortage is also increasing the cost of AI deployment, and massive investment in AI assumes future profits, which may not materialize.
Conclusion
In conclusion, the introduction of ChatGPT has made AI the norm, and the growth of AI promises massive positive changes in the global economy. However, stock market professionals are divided on the prospects of AI-related stocks, and some AI-related corporations are engaged in a circular investment scheme. As Nitin Sacheti, portfolio manager at Papyrus Capital, says, "There will be winners and losers, and people will have to pick their stocks." It’s hard to know which companies will be the winners, but one thing is certain – the use of AI will continue to shape the global economy in the years to come.
https://www.kiplinger.com/investing/tech-stocks/yes-artificial-intelligence-stocks-are-booming
