Richard Schmidt
Key messages
- Explosive growth in AI and AI-related stocks has pushed broad index performance higher year-to-date despite the uncertain global economic environment.
- AI will become an important tool for companies and use of the technology will continue to grow.
- While valuations and expectations are lofty, fears of a dot-com-style bubble appear overly pessimistic.
With the arrival of OpenAI’s ChatGPT in late 2022, we’ve seen a boom in artificial intelligence (AI) and AI-adjacent stocks. The tech-heavy NASDAQ Composite Index is up over 30% year-to-date (as of August 22, 2023), propelled by AI-related companies like NVIDIA Corporation (the current posterchild for AI) that’s up around 220% year-to-date (as of August 22, 2023).
This comes at a time when most are concerned with the general health of corporate earnings and global economic growth. A relatively small number of AI-related stocks has dramatically influenced the performance of broad market indices.
Why all the excitement? Well, ChatGPT made generative AI mainstream. As it came online, the market may have underestimated how far along the technology had gotten. Not only that, large language model AI algorithms (a fancy way of describing AI that can learn and produce human-like responses via copy, images and other forms of media, when asked a question) appear to be improving exponentially and, in many ways, becoming more creative – a trait typically reserved for humans.
The idea that generative AI could be the next big innovation that drives productivity to new highs, has taken hold. Suddenly, companies that are developing AI, investing in it or companies that provide the chips that power AI have taken off.
How big is the opportunity in AI?
The value of adding AI to boost productivity may be incalculable. AI, by its nature, is a tool, just like the run-of-the-mill personal computer (PC). Outside the future value of AI-related companies, there are use cases, big and small, for AI in almost every company, again, just like the PC.
With that said, it’s still somewhat unclear how useful AI will be in the day-to-day operations of a business and how widespread adoption will be. A study conducted by PWC estimates that AI can contribute US$15.7 trillion to the global economy by 2030. Regardless of whether this projection is too optimistic or pessimistic, the general consensus is that AI will become an important tool for companies and adoption will grow over the short to medium term.
NVIDIA: From powering games to powering AI
While OpenAI remains a private company (its shares cannot be purchased via a stock exchange), there are many publicly owned companies we can hold for AI exposure. As mentioned earlier, NVIDIA has really benefited from the AI trend. NVIDIA happens to be the global leader in graphics processing units (GPUs), computer hardware that specifically excels at powering AI computing (GPUs are also more typically used to run videogames and have been used to mine cryptocurrencies). ChatGPT, for example, was created with NVIDIA hardware.
Overall, the Multi-Asset Management Team are believers in the long-term trends driving the proliferation of semiconductors and the development of AI, and we are constantly looking for the best ways to invest behind these trends, whether that’s through NVIDIA, its competition, or other names (while NVIDIA does enjoy a deep and wide competitive moat, competition from rival chip designer Advance Micro Devices Inc. and others is coming).
Given the many facets of AI and the multiple forms of involvement in the space, it’s no surprise that the global equity portions of our portfolios contain many names associated with the technology – Alphabet Inc. (formerly Google), Amazon.com Inc., Apple Inc., Meta Platforms Inc. (formerly Facebook) and Microsoft Corporation, to name a few others.
AI bubble incoming?
With the recent run-up in stock prices for AI-related companies, some are concerned of an AI bubble, much like the dot-com bubble at the beginning of the millennium. While these worries are not completely unfounded, looking at stock price valuations using the price-to-earnings (PE) ratio, the amount you need to pay for $1 of earnings, valuations now (approximately 31 times for the NASDAQ Composite Index as of August 14, 2023) are nowhere near the levels witnessed during the dot-com bubble (peaking around 200 times!1) prior to the pop.
Likely, in this instance, growth is coming slower than investors expect. Unlike the dot-com bubble, these technologies are being developed by established giants – while Pets.com is long dead, Alphabet, Microsoft and NVIDIA are likely going nowhere.
Richard Schmidt
Richard Schmidt, CFA, is an Associate Portfolio Manager with the Multi-Asset Management Team of 1832 Asset Management L.P. His primary focus is on North American equity funds and pools.
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