Is it the inevitable wave of the future, or too competitive to risk capital? Here’s what investors should know about the benefits and risks of investing in artificial intelligence.
What is artificial intelligence and how is it used?
Artificial intelligence (AI) is a term broadly applied to machines programmed to think like humans. This simulation of human intelligence typically requires three components: perception, reasoning and learning.
AI is becoming increasingly prevalent in today’s technology-infused world. In fact, many of us encounter artificial intelligence daily. This type of technology is applied in countless ways, but we most frequently interact with AI through smartphone virtual assistants, chatbots, cybersecurity, smart home devices and semiautonomous vehicles.
Why invest in artificial intelligence stocks?
Like most subcategories in the tech sector, artificial intelligence is on the rise. And as big names in the industry like Amazon, Microsoft and Google continue to beef up their AI programs, so too do the newer players in this space, like Catasys and Sonos.
The increasing prevalence of artificial intelligence suggests this industry will only continue to grow as we become more accustomed to the many benefits this technology offers. AI’s various applications across healthcare, finance, travel and more help cement its status as one of the biggest industries to watch in the coming years. In fact, Statista suggests that global revenue from the AI software market will grow to be worth USD $126 billion by 2025 — a market worth USD $14.69 billion in 2019.
And the good news is that there’s money in this type of technology. Don’t believe it? Simply ask Facebook, Tesla or any number of other blue-chip giants with a robust AI department at their disposal.
Beyond potential dividends, you also have the opportunity to support companies producing technology you may actually use or benefit from in the future. And there’s no denying it — advancements in the world of AI are just plain exciting. Who doesn’t want the opportunity to brag about supporting the next up-and-coming self-driving taxi fleet?
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Artificial intelligence stocks
Few companies exclusively specialize in AI technology. But there are many companies in the tech industry with robust AI programs on deck.International Business Machines Corporation (IBM)
The following ETFs track companies in the tech sector with well-developed AI programs:
TD Global Technology Leaders Index ETF (TSX: TEC)
Horizons Robotics and Automation Index ETF (TSX: RBOT)
FT AlphaDEX U.S. Technology Sector Index ETF (TSX: FHQ)
Fidelity MSCI Information Technology Index ETF (NYSEARCA: FTEC)
First Trust Dow Jones Internet Index (NYSEARCA: FDN)
iShares U.S. Technology ETF (NYSEARCA: IYW)
Technology Select Sector SPDR Fund (NYSEARCA: XLK)
Vanguard Information Technology ETF (NYSEARCA: VGT)
What unique risks do artificial intelligence companies face?
The single biggest threat to companies in this category is competition. High growth sectors are developing fast, and also tend to experience the highest rates of competition. There are countless companies vying to turn a profit with AI technology and this type of competition can be dangerous for investors.
Many of the smaller and more affordable companies available to invest in simply don’t make it, and the already-established names in AI are expensive to invest in. You may get in on the ground floor of something with strong potential only to find the company run out of business by fast-moving competitors six months down the line.
Another big threat to AI stocks is governmental regulation. Tech companies aren’t immune to regulatory disputes and as data and privacy protection measures tighten, some companies may be forced to reconfigure and adapt — and such steps can be time-consuming and expensive.
Artificial intelligence is exciting but can’t develop while unregulated. Governmental and corporate discussions around consumer data protection continue to evolve and investors with AI interests will need to stay alert.
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Bottom line
There’s plenty of potential in artificial intelligence but fierce competition and governmental regulation may put a damper on stock growth for big names and up-and-comers alike.
(Figures in US dollars) Global revenue from the artificial intelligence software market is projected to hit $22.59 billion in 2020 with a compound annual growth rate of 41.6% between 2019 and 2025. This doesn’t compare to the $3.1 trillion expected of the global automobile industry or the $3.3 trillion generated by the oil and gas industry in 2020 — but these are among the most profitable industries in the world.
There are penny stocks available for trade in the tech sector, some of which may be developing AI programs, including United Microelectronics Corp (NYSE: UMC), Exela Technologies, Inc. (OTC Markets, Pink Sheets: XELAW), OneConnect Financial Technology Co., Ltd. (NYSE: OCFT) and LAIX Inc. (NYSE: LAIX).
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga.
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