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A classic strategy is to contain the gains in a “1031 exchange,” in which you roll the capital gains from one property immediately into another, ...
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Specialty REITs concentrate in sectors such as health care, retail and multifamily housing, offering investors a chance to get in on promising trends. You can also chase other trends through specialty REITs, Spinelli pointed out, such as by investing in data centers, which are expanding rapidly to support <anchor>artificial intelligence</anchor> endeavors.
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# How to invest in AI

By

Rocco Pendola

CNN Underscored Money

Updated 12:00 PM EDT, Fri August 30, 2024

Featured Image

BlackJack3D/iStock

In a world saturated with technology, the next big thing appears to be unfolding right before our eyes. While artificial intelligence (AI) can provide meaningful near- and long-term opportunities for investors, it’s important to translate a broad knowledge of the technology into the best game plan for how to invest in AI.

## What is AI?

As a pioneer in the space, IBM, notes that AI is “technology that enables computers and machines to simulate human intelligence and problem-solving capabilities.” A wide-ranging definition with a nearly endless number of ever-evolving applications, AI algorithms are “modeled after the decision-making processes of the human brain, that can ‘learn’ from available data and make increasingly more accurate classifications or predictions over time.”

On the ground, you likely encounter AI when you don’t even know it — in everything from customer service interactions to your time spent on social media. Sometimes, you know it all too well, as an AI-driven bot directs an awkward conversation with, for example, an online retailer or voices over an obviously computer-generated post or advertisement.

AI works with technology, including GPS, chatbots and generative AI tools, such as ChatGPT, to craft, drive and sometimes enhance experiences, efficiency and productivity. At the same time, AI gets blamed for lots of things, such as cheating in high school, even when the evidence shows it might not be guilty.

Occasionally, AI gets used for no good, makes headlines and fuels a debate on its value, or lack thereof, to society. And, of course, there’s growing concern that AI is replacing and will continue to replace humans throughout large swaths of the workforce.

Like most tech, it’s neither good nor bad. AI can be both, or in between, depending on your perspective and the intent of the individuals and groups who utilize and deploy it.

## Important factors to consider before investing in AI

We cited IBM for a reason. You might have heard of IBM Watson, the question-and-answer technology that beat two Jeopardy champions in 2011. The company laid the groundwork for Watson in the 1950s and has been researching AI for more than 70 years. In fact, it was just past the midpoint of the 20th century when AI took major leaps, driving early and modern-day computing.

When deciding how to invest in AI companies, this history is important for two somewhat different reasons:

1. Just because AI hit the mainstream scene recently when ChatGPT became a household name, it has been around for decades.
2. Even so, we’re still only in the early innings of AI adoption.

Research by fund company WisdomTree shows that life-changing technologies, from the automobile to color television to the smartphone, were not “instantly adopted” by the masses. No technology is. It tends to take years, if not decades, to penetrate 80% or more of households. To this end, as big as AI seems today, we have likely only scratched the surface.

## Exploring AI stocks for investment

WisdomTree notes that the number of AI chips produced by companies, such as semiconductor industry leader Nvidia, is expected to grow exponentially, with estimates for the size of the AI chip market ranging from $120 billion to around $400 billion by 2027, from its current level of roughly $71 billion.

### AI hardware companies versus AI software companies

Inside this history and growth, there’s another factor to consider before investing in AI. Semiconductor firms, such as Nvidia, Advanced Micro Devices and Intel, create and sell the hardware that drives AI. And tech companies such as Microsoft, Meta Platforms (the parent company of Facebook, Instagram and WhatsApp) and Alphabet (parent of Google) create and deploy AI-based software directly to consumers and businesses who use that technology with their customer bases.

These names represent only a few of the large and long-standing companies at the forefront of AI. Generally, it’s important to invest in the companies delivering the hardware, such as AI chips, and crafting platforms that run on AI. They’re the ones that stand to directly benefit from the boom now and going forward.

Simply using AI doesn’t make a company an AI company. For instance, a grocery store or other retailer who says they use AI are typically not direct players. Instead, they’re paying other firms for the technology.

In addition to categorizing companies based on how they’re involved in AI, consider adding the following components to your research process. While these elements pertain to evaluating most stocks, they’re of increased importance with respect to AI companies, particularly because there’s considerable risk associated with making large investments in the space.

### Annual and quarterly reports

The United States Securities and Exchange Commission (SEC) makes public companies’ annual and quarterly reports available to the public for free. To access them, simply input the company’s ticker symbol and read through the most recent annual (10-K) and quarterly (10-Q) earnings filings. While there might be a learning curve when attempting to make sense of these documents, don’t be intimidated. The SEC provides a handy guide on how to read annual and quarterly reports. These documents will give you a general assessment of a company’s financial health and current/historical revenue, profits and other key metrics.

### Company press releases

For a condensed and more straightforward version of an annual or quarterly report, read the press releases that generally accompany them. You can access these press releases by going to the investor relations page of the company you’re interested in. These press releases contain highlights from the larger quarterly reports alongside specifics about the company’s business.

You can easily assess the current state and potential of AI in these press releases. For example, the aforementioned semiconductor companies generate a bulk of their AI revenue in their data center businesses.

In a recent Advanced Micro Devices press release summarizing its second quarter 2024 earnings results, the company’s CEO was quoted as saying, “We delivered strong revenue and earnings growth in the second quarter driven by record Data Center segment revenue.” Throughout the release, you see references to data center products and how AI is driving their uptake.

### Company earnings calls

You can dig even deeper by listening to or reading the transcript of a company’s earnings call. Some firms publish these at their investor relations website. If not, you can generally access a transcript for free by searching online. Earnings calls include the financial metrics you find in 10-Ks, 10-Qs and press releases with additional context directly from company executives, often in response to research analyst questions.

For example, Meta publishes transcripts of its earnings conference calls at its investor website.

On its April 2024 call, CEO Mark Zuckerberg opened by saying, “So let’s start with AI. We’re building a number of different AI services, from Meta AI, our AI assistant that you can ask any question across our apps and glasses, to creator AIs that help creators engage their communities and that fans can interact with, to business AIs that we think every business eventually on our platform will use to help customers buy things and get customer support, to internal coding and development AIs, to hardware like glasses for people to interact with AIs, and a lot more.”

AI was mentioned dozens of times on the call. Several of the mentions offer insight into Meta’s AI business that you don’t tend to see in the mainstream media. For example, Zuckerberg noted, “Right now, about 30% of the posts on Facebook feed are delivered by our AI recommendation system. That’s up 2x over the last couple of years. And for the first time ever, more than 50% of the content people see on Instagram is now AI recommended.”

If you’re looking to profit from AI, taking this extra step in your research makes you privy to the type of information many everyday investors never see. You get a real sense of how deep Meta, as just one example, is into artificial intelligence.

Bottom line: Reading earnings call transcripts can give you a better understanding of how companies generate revenue via AI in their businesses and help you make more informed decisions.

### Analyst projections

The more you consume the aforementioned sources, the better you’ll be able to draw conclusions and make investment decisions from them.

A good way to see if you’re onto something as well as get additional perspectives and sound analysis is to go to Wall Street pros. The people who ask the questions on earnings calls are professional stock analysts, typically from large banks and investment firms. They publish their research with qualitative thoughts and recommendations to buy, sell or hold particular stocks. They also present earnings estimates so you can get a handle on if companies are living up to Wall Street expectations.

It can be difficult for everyday investors to access individual analyst reports on a regular basis. These reports generally cost money but may be available through your brokerage platform. Thankfully, many stock quote pages, such as this example for Nvidia at CNN Business, publish analyst ratings and the consensus of analyst price forecasts.

## Finding AI stocks and exchange-traded funds (ETFs)

### AI ETFs

For exposure to artificial intelligence, you might not have to look much further than broad stock market indexes, such as the S&P 500 and Nasdaq 100. Investing in one of the many ETFs that mirror the performance of these indexes gives you significant exposure to leading AI stocks, including Microsoft, Nvidia, Meta and Alphabet.

“By owning a total market index, an investor will already participate in some of the benefits of AI as those companies grow,” said Brian Tegtmeyer, a certified financial planner (CFP) and founder of Truly Prosper Financial Planning. “For a more targeted approach to AI, I recommend ETFs over individual stocks to reduce the risk of single-company investments. If someone is set on investing in individual AI companies, they should only invest an amount they can afford to lose and not gamble their retirement.” A broader stock-market-tracking ETF can provide meaningful exposure to AI as well as broader diversification across the entire economy or tech space.

More than a few AI-specific ETFs, such as the Global X Artificial Intelligence & Technology ETF (AIQ) and the WisdomTree Artificial Intelligence and Innovation Fund (WTAI), keep many of these same leading S&P 500 and Nasdaq stocks at or near the top of their list of holdings but sometimes in smaller concentrations. These ETFs track the performance of underlying indexes made up of AI stocks. As such, the performance of the tracking ETF is virtually identical to that of the underlying index.

As of late August 2024, both funds trail the year-to-date return for the S&P 500 Index, which goes to show that, for exposure to AI, you don’t necessarily have to get too fancy. As Tegtmeyer explained, some broad market indices, specifically the S&P 500, are chock full of AI names. The SPDR S&P 500 ETF Trust (SPY), which mimics the returns of the S&P 500, counts seven AI stocks among its 10 largest holdings, accounting for 31.3% of the ETF, as of August 23, 2024.

AI and AI-related ETFs don’t necessarily have to have AI or artificial intelligence in their names.

For example, if you weren’t aware of the above-mentioned relationship between semiconductors and artificial intelligence, you might miss semiconductor ETFs as a way to invest in AI. However, it’s these ETFs that have benefitted from the emergence of AI. For example, from the start of 2023 through August 23, 2024, the VanEck Semiconductor ETF (SMH), was up 144.8%, thanks to its small number of holdings concentrated in leading AI semiconductor companies, including Nvidia.

### AI stocks

All of this said, if you’re looking to invest in the top-performing AI stocks, history — at least — is on your side.

Here’s how those top seven AI stocks in the S&P 500 have performed against the SPY ETF over one- and five-year periods, as of August 23, 2024.

StockOne-year price performanceFive-year price performance

Apple (AAPL)

+25.2%

+347.8%

Microsoft (MSFT)

+27.5%

+212.5%

Nvidia (NVDA)

+174.6%

+3086.5%

Amazon.com (AMZN)

+30.6%

+102.4%

Meta Platforms (META)

+79.5%

+197.1%

Alphabet (GOOG/GOOGL)

+25.7%/25.1%

+190.9%/187.1%

Broadcom (AVGO)

+89.8%

+511.4%

S&P 500 (SPY)

+26.9%

+97.3%

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Of course, past performance isn’t indicative of future returns. Anything can happen, which brings us back to the importance of conducting proper due diligence when exploring AI stocks for investment.

Per CNN Business data, here are the percentage of analysts recommending investors buy, sell or hold each stock alongside the median, one-year stock price forecast for each.

StockBuy %Sell %Hold %Median, one-year price forecast

Apple (AAPL)

68%

4%

28%

$250

Microsoft (MSFT)

93%

2%

5%

$495

Nvidia (NVDA)

92%

0%

8%

$144

Amazon.com (AMZN)

95%

0%

5%

$220

Meta Platforms (META)

83%

3%

14%

$575

Alphabet (GOOG/GOOGL)

81%

0%

19%

$205

Broadcom (AVGO)

83%

0%

17%

$196

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For their part, Wall Street analysts anticipate a continuation of the current bull market, at least in these leading AI stocks.

## Pros and cons of AI investments

As part of your due diligence, consider the pros and cons of investing in AI assets:

### Pros

- We’re in the early stages of AI adoption, so there might be significant near- and long-term upside.
- Many of the world’s AI leaders are well-established tech companies with stocks that have performed well over the long term.
- AI can provide investors with international exposure, as AI continues to expand internationally.

### Cons

- Legal, regulatory and ethical issues could impede the growth and adoption of AI.
- Tech stocks, particularly the ones with an AI focus, have performed well in recent years, but there’s no guarantee this will continue. Plus, these stocks sometimes experience periods of relatively high volatility.
- If you stray from tech leaders, you might be taking a chance on young companies that lack track records of execution and success.

## Frequently asked questions (FAQs)

How do I select the right AI stocks for investment?

Focus on companies directly involved in developing and deploying the hardware that drives AI as well as firms that create and utilize AI-powered software platforms for consumers and businesses. Be skeptical of non-tech companies who claim they use AI. While they might be appropriate investments in their respective market sectors, they’re not necessarily AI investments.

What is an AI ETF?

An AI ETF is a fund that owns a portfolio of stocks that generate a meaningful amount of their business via direct involvement in creating, producing and disseminating AI hardware, systems and platforms.

What are the risks associated with AI investments?

All investors, from venture capitalists to individuals who buy and sell stocks and ETFs, need to be aware of the risks associated with investing in AI.

One of the major concerns about such a young (from a mainstream perspective) and controversial space is that the rules are currently being written and rewritten around data protection, privacy and copyright, among other regulatory, consumer and sociocultural issues. If the results of AI-related lawsuits or government legislation places tight restrictions around AI, it could affect demand, which could hurt companies that derive a significant portion of their revenue from AI.

Also, while mainstream adoption seems inevitable, AI might not become as big as previously thought. At the same time, with things moving so fast, technology that seems relevant today could be obsolete tomorrow. Thus, the focus on perennial tech leaders rather than companies that claim to be pure plays on AI. And, of course, when it comes to stocks, specifically tech stocks, there is likely to be volatility around stock prices. Just as top tech stocks often lead bull markets, they sometimes drop significantly during down trading days, corrections and sustained bear markets.

Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.

This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.

Note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed or may no longer be available.

What is in this guide?

- What is AI?

- Important factors to consider before investing in AI

- Exploring AI stocks for investment

- Finding AI stocks and exchange-traded funds (ETFs)

- Pros and cons of AI investments

- Frequently asked questions (FAQs)

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