ChatGPT, self-driving cars and a Go-playing supercomputer: the business with artificial intelligence is booming and has long since conquered the financial market. What’s behind the hype and what investors should pay attention to – portfolio manager Noah Leidinger in an interview.
ntv.de: Everyone is talking about artificial intelligence. The topic is also becoming more and more interesting for investors. How does such hype arise?
Noah Leidinger is the podcast host of “Without Stocks Will Be Hard” – one of the largest stock podcasts in Germany.
Noah Leidinger: There are different types of hype. Some of them have little to do with them, others are really economically important. I would include the AI hype among the latter, as there are many areas in which the topic is currently impacting and which are therefore becoming increasingly relevant from an economic point of view. This hype was primarily caused by the chatbot ChatGPT, which OpenAI brought onto the market at the end of last year. Suddenly everyone has seen that artificial intelligence can now imitate the human mind incredibly well in certain areas and, for example, write and summarize texts. This is a huge advantage for a wide range of industries, from tutoring to law firms. Last year, OpenAI’s annual revenue was around $30 million. We are now talking about around 80 million per month. Such a rapid rise has only been seen in a few companies so far. Nevertheless, one thing is clear: Where there is hype, there is always exaggeration.
The EU is already working on regulations; even tech visionary Elon Musk called for a moratorium at the beginning of the year. Could the hype soon collapse again?
Of course, it is possible that artificial intelligence will soon be more closely regulated. But I don’t think the trend itself will collapse. The European Union will not ban AI completely. This would put it out of business economically and there would be no chance of keeping up with China or the USA. In principle, there is no purely regulatory risk.
But?
It could well be that the trend will continue less quickly in the next few years than many currently assume. The question will be whether development will continue exponentially or whether we have reached a plateau where we will stagnate for a few years. What would also be crucial at this point is how much artificial intelligence develops in other industries, for example in the area of autonomous driving. If there were a big improvement in this development, it could boost the trend again.
Is now the right time to speculate on the AI boom, or should I as an investor keep my feet still?
If you want to actively invest in the stock market and generate excess returns, you should first ask yourself: How am I smarter than the overall market? When there is hype, all major investment banks and hedge funds jump on the topic and analyze exactly which companies are involved in which processes. It’s hard to find areas that others haven’t seen yet. Accordingly, most of the companies that benefit from this are already relatively expensive. Nevertheless, getting started can be worthwhile and there are solid companies behind many AI companies. Having these in your depot is certainly not a bad idea in the long term.
When asked which AI stocks are particularly promising, ChatGPT reacts cautiously. Can you be more specific?
The first priority here is to consider whether the investment should be in software or hardware. When it comes to AI software, it is uncertain who will win this battle. Currently OpenAI is the leading company, three years ago DeepMind, Google’s AI company, was at the top. DeepMind created AlphaGo, an AI that was the first to defeat a grandmaster in the game Go, a type of Asian chess. This was previously unimaginable. Meta is also currently working on a language model. It’s quite possible that they’ll soon be at the top. We see that there are several companies in the software space with really strong capabilities. It would be easier to rely on the chip industry, as all AI computing models need large and powerful servers. Starting with Nvidia, which is leading the trend as one of the world’s largest chip developers. There are also many small companies that are also benefiting from the hype.
Should investors rely on individual stocks or ETFs?
If you want to actively invest in the AI trend, you will of course find ETFs that reflect this. However, the price of these is often significantly higher than the costs of classic ETFs such as the MSCI World. In addition, the compositions rarely make complete sense, as there are also companies in the mix that are less promising. Anyone who deals with the topic a little can therefore confidently select individual papers that fit together in terms of valuation and profit.
In addition to ChatGPT and the chip industry – what other areas are interesting?
The automotive industry and the topic of autonomous driving is definitely an exciting field. A JP Morgan analyst just upgraded Tesla’s stock because it is building the Dojo supercomputer for $1 billion. If this ultimately enables autonomous driving, there would be potential for many other things. There are also numerous companies in the technology sector that are becoming increasingly efficient, such as Adobe. On the one hand, there is a risk because there are many image editing programs that work with artificial intelligence. At the same time, Adobe is already implementing these in its own products and could thereby gain a lead. Tutoring platforms like Duolingo are also becoming increasingly efficient thanks to artificial intelligence.
Are there industries that are suffering from the hype?
There are some industries where it is still unclear whether they will benefit or suffer from the AI boom. These include, for example, Indian personnel service providers. Companies are moving tasks to India, where inexpensive software developers such as Infosys or Wipro are taking over the programming. On the one hand, these could become more efficient through the use of AI. On the other hand, there is a risk that AI will completely take over simple programming tasks and make the use of these companies unnecessary.
Are there any additional risks that investors should be aware of?
That depends heavily on the valuation of the shares. If I choose stable chip companies like TSMC or ASML, which only partially benefit from the AI trend, the risk is relatively low. Because the core business remains regardless. At companies like Nvidia, on the other hand, the AI trend has a significant impact on sales. If the boom subsides or AMD or Intel bring a strong competing product onto the market with new chips, the risk of a downturn is much greater. So the same applies as always: If there is a lot of hope in the price, the risk of a fall is also significantly greater.
Leah Nowak spoke to Noah Leidinger