Artificial Intelligence (AI) is making waves in the market. And because of its impact, many are eager to invest in the companies creating the technology.
AI refers to the development of computer systems and algorithms designed to mimic and perform tasks that typically require human intelligence. It encompasses a broad spectrum of techniques and technologies that enable machines to learn, reason, and adapt based on data and experiences.
While the popularity of some of these investments has raised the barrier of entry, it’s a market that, by many accounts, is still in its earliest stages.
“A lot of companies are pushing the boundaries of what they can create in terms of AI products and services as they attempt to revolutionize essentially every industry,” says Ben Wallace, Director of Investments and Member, CM Wealth Advisors. “And they’re really just getting started.”
Smart Business spoke with Wallace about AI investment opportunities and what those interested in the sector should know.
What does the AI market look like today?
The potential of AI is vast, impacting nearly every industry. It offers opportunities for automation, efficiency gains, data-driven decision-making, and innovation that are transforming the way businesses operate and how individuals interact with technology. Given AI’s large applicability, the investment opportunity set is extensive.
In the public market, the stocks of companies with AI exposure have seen their prices run up a lot, making it tough today for a new investor looking to secure those positions at cheap prices. Still, some would argue stocks in this category are inexpensive now given the earnings growth expected over the next five to 10 years.
Though looking at earnings growth is important, some of these companies are seen as being priced for perfection — they need to hit their numbers moving forward on a quarterly basis or there could be significant volatility in their stock prices. Ultimately, it’s a long-term game. Anyone looking to participate in the public market should expect some volatility.
Those who want to add investment positions in early stage AI companies should find an adviser or a family office that already has access to the top VC funds in the space. Data show that top quartile funds have the best chances to remain the top-performing funds in the future. Further, it’s a relationship-driven business. New investors typically can’t access these top VC funds. So, finding someone with those relationships, expertise and track record of success is key.
What are the investment risks?
Today, many private companies looking to raise funding rounds are trying to position themselves as developing something around AI to attempt to capitalize on the hype. AI over the past 18 months has been a sub sector within venture capital (VC) that has thrived while the rest of the VC industry has taken a step back. That’s led many venture capital funds to be cautious about where they place their money.
Regulation is also a large question mark at the moment as governments mull potential restrictive regulation and use cases. Striking a balance between fostering innovation and addressing ethical, safety, and privacy concerns is essential.
Where should new investors start?
Those looking to invest in AI can also find exposure in differentiated ways, such as AI-adjacent projects and services. For example, there are opportunities around data infrastructure projects. In order for hyperscalers to build the large data centers that are required to drive these AI engines, they need large tracts of land in particular locations. There are investment-worthy companies that focus on buying this real estate and creating standardized shovel-ready development sites specifically for data centers. Investing with management teams that are plugged into such differentiated ways to offer their investors AI exposure is one way for new investors to enter the space.
AI represents a growing opportunity set given the disruption it’s anticipated to make over the next decade. Work with a manager or family office that has access to the groups who are paving the way in that industry. They’re going to be the managers who have the outsized performance. ●
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