AI Stocks Are On The Rise, But Be Wary About The Fall

AI Stocks Are On The Rise, But Be Wary About The Fall
Theodora Lee Joseph, CFA

about 1 year ago2 mins

Mentioned in story

It seems like AI-related stocks are programmed to go in only one direction: up. Ever since the rollout of ChatGPT and Microsoft’s multibillion-dollar investment in it, stocks with any link to artificial intelligence (AI) have been all the rage. BigBear.ai, C3.ai, and SoundHound AI have all generated triple-digit returns this year, making the S&P 500’s still-attractive 6.3% returns look a bit tepid. No wonder investors seem more than willing to invest in any stock remotely associated with AI.

But be careful. AI technology is still in its nascent days, and the industry is developing. Which is to say: AI companies are going to have to throw a lot of cash into proving their technology before they can start generating profits, or cash. And the higher interest rate environment is going to make that more challenging. Money isn’t as cheap as it was before, so companies will have to be more prudent in how they spend. Not all AI technologies will succeed, and it’s a fool’s game to blindly chase the rally.

So, sure, there’s definitely a future for AI. But it’s worth remembering that not every company with an AI product or project will be around in a year’s time. So, when you’re investing, choose companies that can generate cash from other parts of their businesses to spend on developing AI technology. Or, even better, choose companies that use AI to complement their current suite of products, like Nvidia.

And remember, there will always be opportunities to invest at good prices. In times like this, when the fear of missing out is huge, dollar-cost averaging (investing set amounts of money at set intervals to disperse your risk) is a good discipline. As with all investments, unless you have a really long time horizon (think: 10 years or more), valuations are going to matter and the price you pay will impact your returns.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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