AI Investment Landscape

Nov 17, 2024

“Artificial intelligence will reach human levels by around 2029. Follow that out further to, say, 2045, we will have multiplied the intelligence, the human biological machine intelligence of our civilization a billion-fold.”

—Ray Kurzweil

Intro

Artificial Intelligence has become one of the defining investment themes of tour times, it is another wave of Internet related business and investing. This wave gained particularly traction in 2023, driven by the rapid adoption of transformative technologies like ChatGPT. The excitement and anticipation surrounding AI’s potential to enhance human productivity have captured the interest of investors globally, prompting many to seek exposure to companies at the forefront of this revolution.

Understanding the AI Investment Theme

Investing in AI is not just about picking the “next big thing” but rather about understanding the broader ecosystem. The companies driving this change span multiple sectors, including semiconductors, software, data storage, and specialized testing. By identifying firms with a significant part of their business model tied to AI, investors can position themselves to potentially benefit from the sector’s growth.

In constructing a broader AI theme, the focus here is more on established companies with substantial market capitalizations and proven revenue streams. This approach helps mitigate the risk associated with investing in smaller firms that may be highly speculative or have yet to demonstrate consistent earnings. The approach aligns with the view that while AI is a promising sector, caution is warranted due to the high valuations and investor expectations currently seen in the market (think of SMCI, Palantir as we will see further down).

Breaking Down the AI Ecosystem: Key Categories to Watch

The companies within this theme can be categorized into five distinct sub-sectors:

1. Semiconductors – The Backbone of AI Innovation
Companies like NVIDIA and Taiwan Semiconductor Manufacturing Co. (TSMC) are leading the charge in developing the high-performance chips essential for AI applications. From GPUs powering deep learning models to specialized integrated circuits, these firms provide the technological foundation for AI advancements.
2. Software Solutions – AI in Action
Major software players such as Microsoft, Alphabet (Google), and Adobe are integrating AI capabilities across their platforms, leveraging machine learning to enhance user experiences and productivity. These companies have vast data resources and established distribution channels, making them well-positioned to capitalize on AI trends. These firms also largely drive the immense Capex wave we are currently witnessing.
3. Data Storage – Fueling the AI Data Demand
With AI’s increasing need for large datasets, data storage solutions from companies like Arista Networks and Micron Technology are becoming more critical. Efficient and scalable data infrastructure is vital for supporting the computational power AI requires.
4. Semiconductor Testing – Ensuring Quality and Performance
Firms like KLA and Teradyne play a vital role in the AI hardware supply chain by providing the necessary testing and validation for semiconductors. Their services help ensure that AI components meet stringent quality and performance standards, which is crucial given the complexity of AI hardware.
5. Consulting and Implementation Services – Bridging the Gap
Companies specializing in implementing AI, such as Palantir Technologies and UiPath, help businesses integrate AI solutions into their existing operations. These firms focus on process automation, data analytics, and custom AI applications, providing practical tools for enterprises seeking to harness AI capabilities.

Palantir has had a terrific year and the stock has gone up 4x YTD. Currently, market cap is $150 billion, which appears excessive. The average price target by analysts is $37-38, so some caution is warranted. And look at that P/E - in mega categories this might not in itself be a problem, just think of Amazon and NVIDIA, but revenues and earnings need to develop very fast.

Balancing Risks and Opportunities

The hype surrounding AI has driven valuations to high levels, as reflected by the elevated Price-to-Earnings (P/E) and Price-to-Sales (P/S) ratios for many of these stocks, as we just saw above with Palantir. While the growth potential is significant, there is also a risk of market corrections if AI adoption or technological advancements fall short of expectations. Additionally, the sensitivity of these stocks to interest rate changes could amplify volatility, especially in a high-rate environment.

The Semiconductor Story: A Crucial Pillar in AI Growth

Semiconductors are at the heart of the AI revolution, powering everything from data centers to consumer electronics. However, the production process is intricate, often requiring advanced manufacturing techniques and extensive lead times. This complexity, combined with geopolitical risks and potential supply chain disruptions, makes the sector particularly vulnerable to external shocks.

The Path Forward: Staying Informed and Agile

Investing in the AI theme requires a disciplined approach, given the sector’s dynamic nature and rapid evolution. By focusing on well-established companies with proven business models, the aim could be to strike a balance between capturing growth opportunities and managing risks. While no one can predict the ultimate winners in the AI space, a diversified and thematic approach can help investors navigate this exciting, era defining yet challenging landscape.

Below is an overview of key companies shaping the AI landscape, offering diverse opportunities for building a comprehensive AI-themed investment portfolio.

AI Investment theme buckets

Semiconductors

• NVIDIA Corp.: Market Cap: 3.600bn, Analysts Target: 159,32
• Taiwan Semiconductor (TSMC): Market Cap: 978bn, Analysts Target: 236,99
• ASML Holding NV: Market Cap: 282bn, Analysts Target: 843,78
• Advanced Micro Devices Inc.: Market Cap: 225bn, Analysts Target: 185,80
• Applied Materials Inc.: Market Cap: 153bn, Analysts Target: 222,00
• Marvell Technology Group Ltd: Market Cap: 78,6bn, Analysts Target: 92,55
• Broadcom Inc.: Market Cap: 796bn, Analysts Target: 195,78
• Samsung Electronics Co. Ltd: Market Cap: 214bn, Analysts Target: 1.801,50
• Texas Instruments Inc.: Market Cap: 188bn, Analysts Target: 211,48
• Qualcomm Inc.: Market Cap: 182bn, Analysts Target: 206,97
• Micron Technology Inc.: Market Cap: 110bn, Analysts Target: 145,96
• Intel Corp.: Market Cap: 108bn, Analysts Target: 24,55
• Analog Devices Inc.: Market Cap: 105bn, Analysts Target: 258,09
• NXP Semiconductors NV: Market Cap: 56,9bn, Analysts Target: 265,91
• Infineon Technologies: Market Cap: 42,7bn, Analysts Target: 37,850

Semiconductor Equipment & Testing

• KLA Corp.: Market Cap: 86,3bn, Analysts Target: 820,13
• Advantest Corp.: Market Cap: 44bn, Analysts Target: 9.536,67
• Teradyne Inc.: Market Cap: 17,3bn, Analysts Target: 136,13
• Lam Research Corporation: Market Cap: 96,2bn, Analysts Target: 94,80
• Tokyo Electron Ltd: Market Cap: 66,2bn, Analysts Target: 33.521,05

Software

• Microsoft Corp.: Market Cap: 3.170bn, Analysts Target: 501,47
• Alphabet Inc. - A Share: Market Cap: 2.150bn, Analysts Target: 209,68
• Meta Platforms Inc.: Market Cap: 1.460bn, Analysts Target: 653,33
• Adobe Inc.: Market Cap: 233bn, Analysts Target: 610,50
• Palantir Technologies Inc.: Market Cap: 135bn, Analysts Target: 36,70
• Snowflake Inc.: Market Cap: 43,3bn, Analysts Target: 164,67
• UiPath Inc.: Market Cap: 6,95bn, Analysts Target: 15,60
• Synopsys Inc.: Market Cap: 84,2bn, Analysts Target: 650,22
• Cadence Design Systems Inc.: Market Cap: 83,1bn, Analysts Target: 316,00

Data Storage & Infrastructure

• Arista Networks Inc.: Market Cap: 122bn, Analysts Target: 443,39
• Micron Technology Inc.: Market Cap: 110bn, Analysts Target: 145,96
• Equinix Inc.: Market Cap: 86,7bn, Analysts Target: 978,43
• Pure Storage Inc.: Market Cap: 16,3bn, Analysts Target: 66,89

Source: Yahoo Finance, Interactive Brokers, Google Finance, Saxo Bank

Conclusion

The rapid rise of AI as an investment theme reflects a broader shift towards technology-driven innovation, akin to previous waves of internet-related business transformations. As we’ve seen, the AI landscape encompasses a diverse set of industries, from semiconductors and software to data storage and specialized testing.

Investors aiming to capitalize on AI’s transformative potential need a strategic and diversified approach, focusing on established companies with proven business models. By carefully selecting exposure across different sub-sectors, it’s possible to balance the promise of high returns with the inherent volatility of this dynamic industry.

With that, thanks for reading, I really appreciate the interest. Below are links to a few other items that you might find interesting.