GenAI: Another Bubble Or Long-Term Investment Opportunity?


All the exuberance swirling around artificial intelligence (AI) technology is reminiscent of the dot-com bubble a quarter century ago. The AI hype has driven the stock market to new highs over the last year, largely on the backs of the Magnificent Seven stocks—Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla—all developing and using AI applications. The parallels to the dot-com era are making some investors nervous, but should they be?

The emergence of revolutionary technologies always raises concerns about a possible bubble, especially with the narrowness of the market advance and the lofty valuations for AI-related stocks. But unlike the early years of the dot-com boom, AI is already delivering tangible value in applications across several sectors, including education, finance, media and healthcare.

While there may be less likelihood of a bubble in AI stocks, investors who want in on this exciting technology should still proceed with caution, taking time to understand it, study the leading players and determine where the transition to AI adoption has the greatest potential to impact the bottom line.

Here are a few critical questions investors should consider before investing in AI technology:

What is the difference between ‘traditional’ AI and the recent ‘generative’ AI phenomenon?

Companies have long used traditional AI to analyze data and make better-informed decisions. For example, credit card companies have long used AI to analyze vast amounts of transaction data to identify patterns associated with fraudulent transactions.

Generative AI (GenAI) takes data from the internet or subsets of data and creates entirely new content like text, audio, images or code. It learns by analyzing vast amounts of existing data to identify underlying patterns and uses this knowledge to generate novel outputs based on prompts or instructions.

While traditional AI utility will continue, the market has embraced the idea of GenAI and is running with it. However, it has yet to fully understand its potential for crucial business applications.

Companies like Microsoft, Google and Amazon are often mentioned as leaders in AI technology. Which company has the competitive advantage?

With its partnership with OpenAI, Microsoft has preferential access to the latest advancements, particularly in areas like large language models. Microsoft leverages OpenAI’s technology across various products like Azure cloud services and GitHub Copilot. Integrating OpenAI’s technology into its Microsoft Office business software is a huge win.

Amazon and Google are taking a more independent approach, developing their own AI tools and services with their robust AI research divisions. Amazon focuses on AI for its cloud service and logistics optimization. At the same time, Google has a broader focus in various areas, such as self-driving cars, healthcare and consumer products like Google Assistant. Their independent approach gives them more flexibility and diversification in AI research and development. They have both also invested in AI startups to solidify their position in this AI revolution.

What other companies are in an excellent position to benefit financially from AI?

Several companies are well-positioned to capitalize on the growing AI market due to their strong foundation in AI research, vast data resources and dominant market positions. Here are a few examples:

Hyperscale Cloud Companies (Microsoft, Amazon, Google)
These companies provide the crucial infrastructure and tools for developing and deploying AI models. Their cloud platforms are experiencing significant growth, driven by the increasing adoption of AI.

Chipmakers (Nvidia, Intel, AMD)
The development of powerful AI models necessitates specialized hardware like GPUs that run on powerful and efficient chips. Many consider Nvidia the first confirmed winner in the AI space because of its edge in producing a highly computing-intensive chip.

Others (Salesforce, Adobe, Meta)
Many software companies integrate AI into their existing products and services, creating new value propositions for their customers. For instance, Salesforce’s Einstein uses AI for sales automation and lead scoring, while Adobe’s Firefly can quickly create content, text-to-image or text-to-movie. Meta is using AI to help target ads better than ever before, increasing the return on investment for its advertisers.

Many companies boast AI capabilities, but it’s difficult to tell which ones will profit from them. How do you determine which ones have investment potential and which are just hype?

Not every company with a cool GenAI application is a sound investment. Here’s how to separate the wheat from the chaff in the world of GenAI:

Focus on the company’s business model.

Clear Value Proposition: Does the company offer a unique and valuable product or service enabled by GenAI? How does it solve real problems or create new opportunities?

Revenue Generation: How will the company make money? Is there a clear path to monetization through subscriptions, usage fees or integration with existing products?

Competitive Advantage: Does the company have a sustainable competitive advantage in its GenAI capabilities? What barriers to entry exist for competitors?

Evaluate the technology.

Technical Proficiency: How strong is the company’s AI team? Do they have a proven track record of developing and deploying effective GenAI models?

Data Advantage: Does the company have access to a vast amount of high-quality data, which is critical for training effective GenAI models?

Scalability: Can the company’s GenAI technology be easily scaled to meet growing demand?

Consider the market.

Market Size: Is there a growing market for the company’s GenAI product or service? Is the market willing to pay a premium for AI-powered solutions?

Customer Adoption: Is there evidence of customer interest in and adoption of the company’s GenAI offerings?

Follow sound investment principles.

GenAI is an exciting emerging technology, so applying sound investment principles is critical. It is crucial to ignore the hype and only consider the company’s fundamentals. Research their AI’s capabilities, target market and profit potential. It’s also essential to spread your investments across several companies or consider a mix of AI and other tech sectors. AI is still evolving, so be prepared for a long-term hold and a bumpy ride.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Jonathan Dash,
Founder and President