I know what you’re thinking.
After the US market carnage in 2022, why should investors care about the latest new trends?
Especially one that is as hyped up as ChatGPT.
As an investor, you’re right to be sceptical.
We should always be questioning whether a developing trend deserves our attention.
Yet, it’s hard to ignore the popularity of generative artificial intelligence (AI) and the practical use cases that are beginning to emerge from ChatGPT and its ilk.
The question is, as an investor, what should you do in the face of an uncertain trend?
Do you avoid Generative AI completely until there are real signs of progress?
If so, you have to accept that you could miss out on the initial hypergrowth.
Alternatively, do you start taking positions in what could be the start of a multi-year trend?
If you choose this path, you could run the risk of falling flat on your face if the trend does not pan out as expected.
The answer, in my view, could lie somewhere in between.
A runway with potholes
At the forefront of generative AI is OpenAI, the creator of ChatGPT, and its key partner, Microsoft (NASDAQ: MSFT).
The Seattle company joined hands with OpenAI almost five years ago in July 2019.
Since then, Microsoft has renewed its commercial partnership with OpenAI, penning a multi-year deal which is rumoured to be worth as much as US$10 billion.
Certainly, we are beginning to see the benefits flow through to the tech giant.
Earlier in February this year, Microsoft announced its new AI-powered Bing search engine and Edge browser. Around a month later, the company reported over 100 million daily active users on Bing.
The rise in interest could translate into actual dollars.
In February, the Seattle firm said it can earn as much as US$2 billion in advertising revenue for every percentage point in search advertising that it gained.
Despite the positive start, moving the needle at Microsoft is a mammoth task.
For context, the Seattle tech giant generated north of US$204 billion in revenue over the past 12 months.
Increasing its topline by 10% would require an addition of US$20.4 billion.
To add a Singaporean perspective, the revenue needed would be the equivalent of adding almost two years of Singtel’s (SGX: Z74) annual sales.
That’s HUGE, to say the least.
By the same token, it also means that Microsoft didn’t need OpenAI to become the company that it is today.
Before generative AI emerged as a trend, the company had an entrenched position in the tech world with valuable franchises such as the Microsoft operating system (OS), Microsoft Office, Microsoft Azure, Linkedin, Xbox, and more.
In other words, if OpenAI fulfils its promise, it could provide a valuable boost to Microsoft’s topline.
At the Smart All Stars Portfolio, we called this cohort Titans, businesses with deeply embedded roots which are hard to dislodge.
So, call me maybe
On the other side of Titans are the start ups.
According to Fortune magazine, valuations for venture-capital backed, pre-money (read: no revenue) start-ups have skyrocketed, doubling its 2022 value in the first three months of this year.
The hard truth is many of these start-ups will not survive.
Some will perish, others may be acquired while a select few may survive and grow into mid-size businesses. With any luck, an even tinier percentage will make it into the tech big leagues.
Some of these businesses may eventually get listed, offering investors the chance to participate in their growth.
Either way, the operational word for investors here is RISK.
Like most small businesses, many will be over-reliant on a few products and lack the kind of revenue diversity that Microsoft offers.
The upside will be higher if they prove to be successful, but then again, the downside is equally high.
Take Fiverr (NYSE: FVRR), an online marketplace for freelancer services.
The Israeli company performed well during the pandemic but is suffering from the after-effects of post-COVID reopenings.
The thing is, such businesses should not be standing shoulder to shoulder with the likes of Microsoft when it comes to how you allocate your cash.
You are free to ignore the smaller businesses, of course.
But if you have a taste for adventure while acknowledging the downside, then allocating a smaller amount could be right for your portfolio.
We call these businesses: Trailblazers.
Some will thrive beyond our wildest imaginations. Others may fail to fulfil their potential.
That’s why we keep this segment of stocks on a tight leash, only allowing a small percentage exposure to this cohort.
Get Smart: Managing risks
Investing in stocks comes with risk.
So for investors, the question should be on how you manage risk.
It’s hard to ignore the incredible progress that AI technology has made in recent years. And it could change how we work and invest in the near future, just like how the internet and iPhone did in the early 2000s. Download our Special Free Report and prepare for what could be the biggest game-changing tech for many companies. Click here to download.
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Disclaimer: Chin Hui Leong owns shares of Fiverr and Microsoft.
