Earlier this year, Bottom Line ­Personal told readers how ­artificial intelligence (AI), and in particular ChatGPT, were on the verge of changing how we live, shop and work because they would allow us all to interact with humanlike, powerful computers. The global AI market is expected to reach $900 billion by the end of 2026. Wall Street has dubbed AI the “Next Big Thing,” a technology so innovative that it could spawn millionaires among those lucky enough to get in on the ground floor.

Within months of the ChatGPT launch, a handful of AI-related stocks soared in value. Nvidia, a company known for making graphics-processing chips for video games, has soared 178% in 2023…software firms C3.ai and Samsara have risen 186% and 102%, respectively. These gains caused a frenzy among investors worried about missing out—but also a nagging concern that perhaps the hype was getting ahead of the reality. After all, many investors have been burned in recent years chasing hot new themes ranging from cryptocurrency to 3-D printing to the metaverse.

Bottom Line Personal asked stock market expert Christopher Gannatti, CFA, how he thinks the AI market will develop and the shrewdest ways to invest now. And on page five, top analyst Neena Mishra, CFA, considers whether investors can benefit in a different way from AI—by letting genius supercomputers pick stocks for you.

Very Early Stages

Like the “iPhone moment” of the early 2000s or the Internet boom of the 1990s, AI could be one of those few defining opportunities an investor gets in a lifetime. The industry’s growth and profits will be driven by the richest companies on the planet such as Alphabet, Amazon and Microsoft, all committed to spending untold billions in the race to use this technology in their businesses.

But for small investors, making money in AI is going to require some old-­fashioned intelligence. AI is in the very early stages, and it is uncertain how fast and in what directions the industry will develop. There are likely to be many years of booms and busts, surprises and volatility. Potential surprises that could limit AI or change its trajectory for investors…

Federal intervention. Deep fakes of audio and video content could disrupt next year’s Presidential election, leading Congress to create an agency to strictly regulate AI systems.

Consumer backlash over privacy concerns. Imagine you get a notice from your car insurance company raising your premiums based on the amount of times an AI program tracked you making phone calls while driving.

Economic harm from rising unemployment and job losses. Goldman Sachs predicts that 300 million jobs globally could be replaced by AI.

But there are smart ways for small investors to play the AI revolution, says Gannatti. Here are his suggestions…

Don’t chase highly overvalued stocks. AI is an increasingly crowded trade. Investors have piled into a few companies, spiking their valuations and making it hard for investors to find real value. Example: In May, Nvidia’s (NVDA) market value hit $1 trillion. The company deserves a premium valuation because its chips—capable of running 30 trillion calculations per second—can dominate the market for key hardware needed to run complex AI algorithms. But Nvidia’s current price-to-earnings ratio (P/E) is 212 compared to an average of 22 for S&P 500 companies. If you are patient and disciplined, you may be able to get exposure to AI darlings like Nvidia at better prices at some point in the future.

Buy pick-and-shovel stocks. The companies that supply tools and services for the semiconductor industry or that make specialized chips could be big winners. The $22 billion global semiconductor market is expected to rise to $135 billion by the end of the decade. Three pick-and-shovel stocks to consider…

Infineon Technologies (IFNNY). Cars are evolving into computers on wheels. This German-based company specializes in AI chips that gather data in real time and oversee the safety and powertrain systems in electric vehicles. Recent share price: $38.95.

Synopsys (SNPS), a leader in electronic design automation, provides predesigned circuits that engineers use to build larger chip designs. Recent share price: $417.21.

Taiwan Semiconductor Manufacturing Co. (TSM). Nvidia and other major semiconductor companies design chips but don’t actually make them. That falls to this Asian foundry, which produces nearly 60% of the world’s semiconductors that run smartphones and laptops and more than 90% of the most advanced ones in its fabrication plants. Only ­Taiwan Semiconductor has the technology to manufacture the microscopic circuitry in AI chips. Despite its dominance, the company’s stock can trade at a discount due to the threat posed by China, which has vowed to unify ­Taiwan with the mainland. That unification would have a largely negative impact on this stock. Recent share price: $100.11.

Invest in the new generation of cybersecurity. Cyberattacks are growing in volume and complexity. Example: AI-generated phishing e-mails constantly change to avoid standard security software. The global market for AI-based cyber-security products is estimated to reach $133.8 billion by 2030, up from $14.9 billion last year. One stock to consider…

SentinelOne (S). The company’s XDR platform is an autonomous security system that helps detect ­cyberattacks accurately, prioritizes responses based on risk and provides extensive modeling to predict future attacks. Recent share price: $14.93.

Look for companies in nontech industries that can leverage AI to improve their businesses and disrupt their industries. Stocks to consider…

Exscientia PLC (EXAI). It takes more than $2 billion and 10 to 15 years to bring a new drug to market. This British biotech firm, which focuses on oncology, has created an AI system to rapidly build accurate models of proteins and accelerate the process of designing novel compounds for clinical testing. The company’s most advanced therapies to treat renal cell carcinoma (the most common form of kidney cancer) and non-small cell lung cancer are in Phase 1 and Phase 2 trials. Recent share price: $5.75.

Deere & Co. (DE). The 180-year-old company, the largest supplier of farm equipment and machinery in the US, has become a leader in AI agriculture. Its autonomous tractors, controlled by a smartphone app, gather data as they plow fields, increasing crop yields with less work and water. Deere’s “See and Spray” system uses technology to identify weeds and use less herbicide. Recent share price: $410.19.

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