Artificial Intelligence: Opportunity of a Lifetime or a Bubble?

Several decades ago, a cybernetic assassin was teleported from 2029 to 1984. Its mission was to kill off a human. While The Terminator was classified as “science fiction” back then, perhaps it should be considered a “horror” film today.

Investors always flock to something. Artificial intelligence (“AI”) is the latest theme to attract attention. Companies that mention “AI” in their conference calls and press releases are seeing a boost to their share prices. According to Societe Generale, the S&P 500 would be down 2% year-to-date if AI stocks were excluded from the index. Instead, it’s in positive territory. During the Q1 earnings calls in the U.S. and Europe, “AI” was mentioned more than 1500 times.

Several prominent people within the technology space, including Elon Musk, have called for a pause to assess the dangers of AI. Tech gurus are not the only ones concerned. More than two-thirds of the respondents in a recent Reuters/Ipsos poll cited concerns about the negative effects of AI while 61% believed it could threaten civilization.

The growth in this area will be huge. In 2021, the AI market was valued at about $330 billion. It is projected to grow by a 20% compounded annual growth rate to be worth almost $1.4 trillion in 2029. Goldman Sachs recently estimated that AI could boost net profit margins by 400 basis points over the next decade.

But, at what price does it become too expensive?

Just like every other industry in its infancy, there will be winners and losers.

• Have you ever bought a car? Chances are, you have. Almost 3,000 car companies have started shop in the U.S., yet only a few major manufacturers remain a century after Henry Ford’s Model T first spun its wheels in Detroit.
  
  
• Imagine spending a day without using the Internet. Yet, the dot-com bubble burst in the early 2000s and the Nasdaq fell an astonishing 78% between March 10, 2000, and October 9, 2002. It took 15 years for the exchange to recover the lost ground.
  
  
• Remember when the weed stocks took off in 2018? Canopy Growth almost touched $67/share. Today, it’s $1.41/share, erasing an entire decade of gains.

We’re starting to see the bubble forming now. Last week, the Bank of America published a report saying that AI is in a “baby bubble” that echoes the dot com era.

Our exposure to AI will not involve purchasing speculative stocks with no revenues or profits. Instead, we prefer established companies. Alphabet fits our criteria. The company is debt free, generates huge cash flow, and trades at a reasonable valuation.