Don’t Get Burned By The AI Boom

Key Points

• AI is the next big thing in tech, and it will produce bubbles investors should be wary of. 
• The industry is expected to grow at a 37% CAGR, but the growth will not be spread evenly among industries. 
• Software and services are where the money is flowing, and the analysts are most supportive. 

AI is happening. It’s about to change the world and will cause a boom in productivity unlike any we’ve seen. The shift to AI will also cause a boom in the stock market, and investors should be wary. Hype, because that is what it is; the hype about the growth potential is akin to what we’ve seen before.

The Tech Bubble of the 90s aside, since then, we’ve seen the cannabis, EV start-up, and metaverse markets boom and burst to leave early investors wishing they hadn’t bought in. This doesn't mean AI is something to avoid, far from it, but it is essential to understand where the money is going and not chase the market higher.

The Chip Makers Lead The AI Market 

The chip makers are leading the AI market because it takes next-gen chips to power AI. This is helping to sustain the businesses but isn’t producing growth, given the downturn in demand for old-school chips. In this regard, investors should expect the chip makers to remain strong due to the shifting nature of their businesses, but for them, AI is just the next evolution in technology. Once it’s in place, the older businesses will disappear; some may become harvest brands, but AI will mainly become business as usual. There will always be the next technological step, but a breakthrough will only make today’s “next-gen AI technology” obsolete.

NVIDIA NASDAQ: NVDA and Advanced Micro Devices NASDAQ: AMD are leading AI chip makers because of their association with gaming, cryptocurrency mining, and data centers. Their AI products utilize multiple GPUs and chipsets that are powerful enough to handle the massive data loads required for machine learning. NVIDIA is leading the pair higher but may have difficulty reaching a new all-time high, given the 20% decline in YOY earnings and the outlook for next year. Growth will return for NVDA, but it won’t set a record; the analysts have been driving the stock higher, but it’s exceeded the consensus estimate and will need another catalyst to move higher. AMD has a similar outlook so it may close the price gap. 

AI WIll Grow At A 37% CAGR For The Next 7 Years 

AI will grow at a 37% CAGR for the next 7 years, but the growth will not be spread evenly across segments. The hardware segment, including the chipmakers, will grow slowly and be the smallest part of the market. The AI software and services segments will grow faster, accounting for more than ⅔ of the total market. That means names like Microsoft NASDAQ: MSFT, Alphabet NASDAQ: GOOG, and Amazon NASDAQ: AMZN, which already dominate the software and services markets, will continue to do so. They already embed AI into services, and the shift will only accelerate. This will help them achieve greater internal efficiency while aiding clients to do the same. 

The analysts support these names as well and see more upside potential. Amazon’s consensus target is about 22% above the current price action, and the analysts support the market if they are not leading it higher. Google is also a Moderate Buy with a price target that assumes some upside, although its consensus has been falling. Microsoft may be the best choice in 2023, with analysts raising their price targets and leading the market higher. Microsoft is the only 1 to pay a dividend. 

Salesforce Is A Top AI Service Provider? 

Salesforce.com NYSE: CRM, the leader in cloud-based customer relationship management software and services, is a top AI service provider. The company offers a variety of AI-powered tools to help clients manage and access their data. Shoe Carnival NASDAQ: SCVL is one of the company’s success stories; Salesforce.com help it to unlock margin via a highly successful reward program. The analysts also support CRM shares and have that market in a reversal.