If we were owners of either Nvidia (NASDAQ: NVDA) or Microsoft (NASDAQ: MSFT) shares over the last couple of years, we should be more than delighted at how those two counters have performed. Nvidia is up a whopping 600 per cent, while Microsoft has surged by over 200 per cent.
Most of their gains have happened in the last 12 months, which roughly coincides with the explosion of talk about artificial intelligence (AI) in the market.
I do own Microsoft shares. And as much as I would like to claim that I was enlightened enough to predict the advent of AI, nothing could be further from the truth. I bought Microsoft a long time ago for its small but rapidly rising dividend payout. The fact that it was somehow involved in AI came as a total shock. I was not even expecting its shares to surge. I had absolutely no idea. Serendipity invariably catches us by surprise.
The next Nvidia
Since then, the rise and rise of AI has caught investors’ imagination, as they go in search of the next Nvidia or Microsoft. It is reckoned that the feverish quest for the next AI multi-bagger has almost single-handedly powered the rise in US shares this year.
Traders are wondering if another chipmaker could usurp Nvidia as the king of AI. It is certainly possible. After all, the stock market is littered with examples of once high-flying peacocks that have turned into tomorrow’s feather dusters.
But which one could it be? Might it be one of the incumbents such as Intel (NASDAQ: INTC) or Advanced Micro Devices (NASDAQ: AMD)? Perhaps it could be mobile-chip specialist Qualcomm (NASDAQ: QCOM). Your guess is as good as mine. What we do know is that chasing after pipe dreams can also result in rude awakenings. Still, if AI should pan out the way that experts predict, it could be as life changing as the Industrial Revolution of the 1800s and the invention of the World Wide Web by Tim Berners-Lee.
Looking for El Dorado
However, hunting for winners could be as elusive as panning for the yellow metal during the California Gold Rush of 1849. Sure, some forty-niners hit the jackpot and made their fortune. But even if they did, they might only be in the money for a short period of time.
The biggest winners in the Gold Rush were the boring merchants who provided the necessary tools – picks and shovels – for many a hopeful prospector. Those shopkeepers did not care if a miner should go home empty-handed or find their El Dorado. They get paid regardless. A similar logic could apply to AI.
With so many tech firms out there prospecting for AI, the search could be akin to looking for a needle in a haystack. A more prudent approach could be to look at companies that can harness the technology. But even then, it is unclear where their excess profits from AI will come from. Some say improved productivity could help boost profit margins.
But improved productivity from AI is a movable feast. It only works if its use is limited to just a few. But when everyone has access to AI, then that would almost be the same as nobody having AI, because the unique selling proposition could be severely diluted.
A roll of the dice
A better way to capitalise on AI could be to look at the real suppliers of picks and shovels. These could be energy companies because mining data through AI and large language models is reckoned to be highly energy intensive.
According to the International Energy Agency, if ChatGPT were integrated into the nine billion searches done each day, then the electricity demand would increase by 10 terawatt-hours a year. That is equivalent to the amount of energy consumed annually by about 1.5 million European Union residents.
The AI genie is now out of the bottle. It is impossible to turn back the clock in much the same way that it would be almost impossible to exist without the Internet today. The race to incorporate AI into almost everything that we do could be relentless.
However, identifying AI winners could be no better than a crap shoot. A roll of a dice does not sound much like investing to me. I would much rather stand on the sidelines and bet on the energy companies instead.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: David Kuo owns shares of Microsoft and Qualcomm.
