Generative AI is all but set to become the technological breakthrough of the year, with platforms like ChatGPT generating frenzied international interest and an ever-growing series of use cases. Even though the furore surrounding artificial intelligence continuing to build, is now the time for investors to buy into generative AI? Or as a bubble beginning to form around the industry?
Make no mistake, institutional investors are already falling head over heels for generative AI.
“Technology is an industry that is driven by innovation. We had the internet in the 1990s, cloud computing in the 2000s, mobile in 2010. The 2020s are the decade of generative AI,” said Reid Menge, BlackRock Fundamental Equities Portfolio Manager. “This is the ‘what’s next’ that we’ve been waiting for.”
According to a recent PitchBook report, VCs have continually bought into generative AI positions, growing from $408 million invested in 2018 to $4.5 billion in 2022. Furthermore, angel and seed deals have grown to 107 deals worth $358.3 million in 2022, up from the 41 and $102.8 raised in 2018.
But what actually is generative AI? And why does it represent such a big opportunity for institutional investors?
Defining Generative AI
Generative AI refers to a form of artificial intelligence and machine learning technology that can produce, or generate, various forms of content like text, images, audio, and synthetic data all from the prompt of a user.
In recent months, the topic of generative AI has exploded thanks to the introduction of simple user interfaces that have paved the way for the generation of high quality images, text, and videos in a matter of seconds.
Although we’ve already become accustomed to using generative AI in more rudimentary forms through online chatbots, recent developments have seen platforms generate photorealistic images that have the power to fool even the most eagle-eyed of onlooker, like when AI tool Midjourney fooled the internet with an image of Pope Francis in a large white puffer jacket.
While this has raised concerns about the speed in which artificial intelligence is developing, it’s clear that AI has the potential to be one of the most disruptive technologies ever harnessed across industries–causing much excitement and FOMO around Wall Street and beyond.
Where to Find Value Generative AI Investments
While ChatGPT is the incarnation of generative AI that has made the technology increasingly commonplace today, its parent company, OpenAI is yet to go public. However, there are plenty of other investments that have major stakes in the world of artificial intelligence.
One company that’s set to directly benefit from the fortunes of OpenAI is Microsoft (NASDAQ: MSFT), which initially invested in the startup in 2019 in a deal worth $1 billion. Today, Microsoft’s cumulative investment in OpenAI stands at around $13 billion, which has invariably helped the firm’s stock to rise in association with the generative AI leader.
Although we can see that Microsoft’s stock suffered heavy losses amid the tech stock sell-offs of 2022, the company has staged a rowsing recovery in Q1 2023, growing nearly 25% since the beginning of the year.
Another stock that’s set to perform well alongside the emergence of generative AI is NVIDIA (NASDAQ: NVDA). The scale of NVIDIA’s growth is nothing short of astonishing in 2023. The chipmaker has found itself at the forefront of AI and the early development of the metaverse, causing an influx of widespread investment.
The sheer volume of computer chips to support artificial intelligence, edge computing, data centers, self-driving cars, robotics, smartphones, drones, and other emerging technologies means that NVIDIA has the enviable position as market leader in an industry that’s in very high demand.
In 2023 so far, NVIDIA has rallied nearly 90%, and has grown more than 380% over the course of five years.
Although there may be more future competition among startups like firms like Advanced Micro Devices (NASDAQ: AMD), and startups like Cerebras, Sambanova, and Graphcore to come, NVIDIA stands as one of the strongest players in the burgeoning AI landscape today.
Caution is Still Recommended
Naturally, as the technology that’s firmly entered the limelight in 2023, generative AI is likely to experience massive demand from investors that could lead to a bubble forming around the industry amid unsustainable growth akin to the 2021 post-pandemic tech stock recovery.
“Generative AI remains early in its commercial journey and, as excitement grows about its potential impact, there are signs that valuations are outpacing the technology, which risks making investment less attractive,” warned Gareth Llewellyn, investment director at Northern Gritstone.
“Due to the costs of building core platforms, the greater opportunity for venture capital is in backing ‘problem solvers’ with clear use cases. As a purpose-driven investor, we are most excited by companies focused on ESG challenges, such as drug discovery or advanced materials, where generative AI can bring huge societal benefits, as long as it is used in an energy-efficient manner.”
There’s also the matter of the economic uncertainty and high global inflation rates that have helped to hinder the performance of tech stocks throughout 2022 that continues to refuse to budge.
While some nations may spend much of 2023 facing a recession, Maxim Manturov, head of investment advice at Freedom Finance Europe, suggests that wider economic downturns may provide a credible opportunity to take on long-term positions in viable tech firms.
“Although technology stocks have been hit hard in the market, the recession could open up opportunities for growth. In particular, software, AI and cybersecurity are expected to thrive once interest rate hikes have stopped,” explained Manturov.
“Moreover many large technology companies have very strong fundamentals, balance sheets and liquidity and such strengths will help them to overcome a possible recession and, as the peak of uncertainty passes, open long-term opportunities for investors to buy quality assets at attractive prices and valuations.”
Embracing Generative AI Stocks
While much tech market volatility remains, generative AI stocks can be an excellent addition to portfolios for investors who believe in the long-term viability of artificial intelligence.
Although the industry is very much in its infancy, it’s clear that the potential use cases for the technology are immeasurable, and backed by a sufficient data infrastructure, we’re likely to see AI disrupt many industries in the coming years.
For investors, it’s certainly worth remaining cautious given uncertainties surrounding global economic concerns and the difficult regulatory landscape surrounding AI, but adding artificial intelligence as part of a diversified portfolio may prove to be a shrewd move for investors.
This article was originally published by Dmytro Spilka on Hackernoon.