How To Invest In AI

Artificial Intelligence (AI) is no longer a futuristic concept—it's seen as a transformative force reshaping industries and everyday life. From virtual assistants in our homes to autonomous vehicles on our roads, AI is quickly being added to many products and applications, dominating discussions of investments and questions about the future. Investors are eagerly seeking ways to capitalize on this rapidly growing industry.

However, investing in AI is not without its challenges. The AI landscape is complex and news of added capabilities at one firm reshuffles the pace of change at all of them. Just as investors half a generation ago had to separate the wheat from the chaff among smartphone and app-based startups, so, too, now with niche players and established tech giants vying for AI market share and research capital.

In this article, we explore the leading AI stocks and funds and how to become a savvier investor in this space.

How To Invest In AI

Like past emerging technologies, such as the railroads in the late 1800s or the personal computer in the 1980s, there are many ways to invest in this new trend. However, while some companies will have wild success, other early adopters will fail.

The computer revolution is an apt analogy for AI investing because while computers set the stage for automating mundane and repeatable tasks, AI now seeks to advance this concept by automating tasks that previously required human intelligence.

AI has fast become an important disrupter technology. Identifying these trends and investing in new companies can yield significant profits. Still, given the tremendous competition, it's not going to be easy to recognize which companies will emerge as winners.

Sometimes, one firm takes and holds a market-leading position, but other times, an imitator can use the first company's technology better, making it more successful over time.

Some people will want to invest directly in companies that develop AI, while others may invest in those companies that stand to benefit the most from its wider adoption. Using the introduction and growth of the personal computer industry as an example, investors could have successfully invested in computer manufacturers or hardware companies that made routers and switches. Others invested in software companies that produced computer programs, while others attempted to identify companies that would benefit most from the automation that computers offered.

Some of these investments were direct bets on computers and the actual technology, while others were more conservative, such as buying shares in already strong companies that stood to benefit from the growth of computer usage. The point is that there are winners and losers when new technologies emerge. 

Finally, given that many believe AI may have a solid economic impact and displace many workers in many industries, there may be opportunities to identify companies, such as those focused on worker retraining, that may benefit from these large shifts in the workforce.

Invest in AI Stocks and ETFs

Leading Companies in AI

• Tesla (TSLA): Tesla uses AI to automate driving, which requires constant data processing to identify other cars, road conditions, traffic signals, and pedestrians. As anyone who has driven knows, this requires constant scanning and processing to account for instantaneously changing conditions. Its market cap as of May 2024 is almost twice that of the next automotive company, Toyota, and 12 times that of Ford Motor Co.
• NVIDIA (NVDA): NVIDIA Corp. is at the forefront of the AI revolution thanks to its work in designing and developing graphics processing units (GPUs) and related software and hardware products. Investors have noticed: as of May 2024, its share price had tripled over the past year and had grown by more than 2,000% in the past five. GPUs, originally created for the PC graphics and video gaming industries, have become the backbone of AI, machine learning, autonomous vehicles, robotics, augmented reality and virtual reality applications, and even cryptocurrency mining systems. 
• Microsoft (MSFT): Microsoft has a partnership with OpenAI, the company behind ChatGPT. It has leveraged that partnership to embed AI in its Azure cloud services, and Microsoft 365 now has an add-on subscription for generative AI, called Copilot. Microsoft said in its April 2024 earnings call that 65% of the Fortune 500 was using its Azure OpenAI service, about the same percentage that it said was using Copilot.
• Taiwan Semiconductor Manufacturing (TSM): Taiwan Semiconductor Manufacturing is the world’s largest chipmaker and another major player in chip manufacturing for artificial intelligence. As AI use grows, the need for robust computing chips will grow with it. TSM is a mature company that continues to make chips for non-AI computer applications, so it may represent less risk than other pure plays on AI. Over the past five years, its stock price has risen about 230%, and its annualized growth rate from 2019 to 2024 is 17.7%.
• Meta Platforms (META): Meta has made significant investments in AI, building out its own large language module to drive search results and predict the content its users want to see. It has also put generative AI into its family of apps, including Facebook and Instagram, and continues to develop new generative AI capabilities for its advertising services.
• Amazon.com (AMZN): Amazon uses AI in its Alexa system and also sells machine learning and AI services to business customers. Amazon’s cloud computing business, Amazon Web Services, provides an AI infrastructure that allows its customers to analyze data and incorporate AI into their existing systems. Amazon has also made its Amazon Q AI assistant generally available for software development and data analysis. Through Amazon Bedrock, developers can access AI foundation models (used as a base for building more specialized AI systems) from companies like AI21, Anthropic, Cohere, Meta, and Amazon itself.
• Apple (APPL): Besides Siri, which employs AI to interact with customers, Apple has been integrating AI into its photo, camera, health and fitness, map, and other applications for some time. Investors have been waiting, though, for Apple to connect Siri and its other products to generative AI. For now, Apple users can use OpenAI's iPhone app for ChatGPT, from which Apple gets 30% of the revenue. In addition to AI companies delivering services through Apple’s platform, the company can also use its massive cash reserves to make major investments in AI that it builds itself or acquires with its massive cash reserves.

Compare Some Top Brokers for Investing in AI Stocks

Best AI ETFs

Investing in professionally managed ETFs or mutual funds that hold shares in AI companies allows you to leave it to a fund's professional managers to research and pick suitable AI companies. Through an ETF, you own a share of a portfolio of multiple AI stocks within a single investment.

• iShares Exponential Technologies ETF (XT): XT is a large capitalization fund that selects global stocks trying to disrupt their industries. This includes AI technology stocks, which comprise almost half of the fund. The other half is in healthcare and industrial stocks, which are also actively looking at how AI might make an outsized difference in their more mature industries. This fund has an expense ratio of 0.46% and an annual yield of 0.44%.
• Defiance Machine Learning & Quantum Computing ETF (QTUM): With about $246 million in net assets, this fund invests in companies trying to commercialize their research and development in quantum computing systems. Its benchmark is the BlueStar Quantum Computing and Machine Learning Index. It has an expense ratio of 0.40% and an annual yield of 0.80%.
• ROBO Global Robotics & Automation Index ETF (ROBO): ROBO invests in companies focused on robotics, automation, and AI, including growth and value stocks. The fund’s expense ratio is 0.95%, and its annual yield is 0.05%.

Some Top Brokers To Invest in AI ETFs

How To Search for AI Investments

Buying individual AI stocks is more work for the investor. Given the multiple ways to invest in this sector, the first step is to read about the industry to understand the various aspects of AI. Within the AI universe, there are pure plays and more conservative plays, and you'll have to decide the type of exposure you want in this market sector. Once you have an idea of the parts of the AI market you want to invest in, you can perform traditional investment analyses—both fundamental and technical. 

• Earnings forecasts: Earnings are a great way to judge a company's performance, and AI companies with consistent and growing earnings should be looked at favorably. Many AI companies will be viewed as growth stocks, so earnings growth will be an important criterion for many investors. Earnings releases tend to move AI stocks up or down sharply.
• Annual reports provide important narrative information about the company's activities, and the financial statements allow you to review the company's debt-to-equity and other accounting ratios, which are used to make financial decisions about stocks. 
• Relative performance vs. the market: Relative performance is how an individual stock performs compared with an index or another stock. For newer AI companies, it's best to compare their relative performance with similar companies. 
• Growth analysis: This deals with a company's growth over time. You'll examine earnings, market share, and other metrics to determine the company's strength and prospects.
• Analyst projections: These analyses and reports can be especially worthwhile if you're new to the AI space. This volatile market has constant and new technological developments, and company prospects change much more quickly than in more mature industries. Therefore, it's good to gain the perspective of professional researchers who understand the overall AI space and the prospects of individual stocks relative to competitors.

Bottom Line

Investing in AI in 2024 offers compelling prospects for inclusion in your portfolio. The technology continues to further penetrate different parts of the media, healthcare, automotive, finance, and other sectors.

However, you'll have to navigate challenges that could include potential legal and regulatory changes, supply shortages, and the broader political and ethical considerations concerning the widespread deployment of AI systems and the ecological effects of powering them. Staying informed and selectively investing in companies prioritizing robust business models will be crucial for those looking to capitalize on the AI boom while mitigating risks effectively.