It’s no exaggeration to say that no new technology since the Internet itself has captured the attention, focus, and scrutiny of both the business world and the general public quite like Artificial Intelligence (AI) and Large Language Models (LLMs). The technology has been marketed as everything from a perfect technological assistant, to the silver bullet capable of slaying science’s last lingering monsters of data analysis—claims that cannot help but draw the attention of companies and investors of all stripes. Between the AI leaders racing to evolve (and market) the technology the fastest, to the companies overhauling their entire workflow processes to integrate it, the entire business world is scrambling to get in on the ground floor of the next technological revolution.
It’s easy to buy the hype, especially when there’s so much of it, especially considering how early AI investments have panned out. However, a successful investor is a patient and observant investor; racing to invest in a transformative new technology is always a risk, and AI tech is no exception. Jesse Ransford, a corporate finance consultant and analyst with Economic Partners in New York, is looking at the AI boom with long term planning in mind, and it’s impossible to say which companies are going to come out on top. Between fears of overvaluation, potential gains in infrastructure investments, and a range of second-order effects, sustainably investing in and around the AI boom may require more nuance than many expect.
“It’s very difficult to predict which companies will dominate the future of artificial intelligence,” Ransford explains. “If we look back at the dot-com era in the nineties, Yahoo, IBM, and Intel were considered the most promising and innovative companies. Today, these firms struggle to maintain relevance.”
Investing In Value, Not Hype
When a given sector is experiencing a boom like the one AI is generating now, it’s difficult to differentiate between the long-term winners of the space and the companies just looking to ride the hype. The investors that experience the most success are the ones that are able to accurately assess and invest in the former, but picking those ultimate winners is nearly impossible in the moment. For that reason, Jesse Ransford looks at the larger picture, and makes diverse investments in a few key areas: service providers with infrastructure, companies providing upstream supply for the technology, and companies that benefit from growth without necessarily being invested in the tech themselves.
“Leaders in the AI race, including OpenAI, Anthropic, and Meta, all require the same infrastructure to build large language models,” he explains. “Such infrastructure includes specialized semiconductors, data centers, and energy plants. NVIDIA (NASDAQ:NVDA) is the obvious contender here, but I have withheld investments from the behemoth in fear of overvaluation. I have also invested in a power company that has repositioned itself for the AI boom.”
Fears of overvaluation are not uncommon among investors; there’s plenty of historical precedent to justify the hesitation. AI-related stocks are currently trading high, and avoiding overpaying is a necessary part of a wise investment. Ransford leverages Price-Earning ratios (P/E) to analyze stocks, and P/E ratios above a certain threshold can signify potential stock overvaluation. For example, a P/E of 10 would mean that an investor is paying $10 for every $1 earned over a one-year period—a ratio preferred by known value investor Benjamin Graham. Warren Buffett prefers P/Es below twenty. What ratio do many AI stocks have?
“As a general framework, I view Price to Earnings(“P/E”) ratios above 30 as a signal that a stock is likely overvalued,” Ransford explains. “Tesla (NASDAQ:TSLA) is currently trading at a P/E ratio of 247, while Palantir Technologies (NASDAQ:PLTR) is trading at 595.”
Examining Other Variables
Aside from a potentially overinflated stock, there are other confounding variables that may make investing sustainably in AI trickier than it may initially seem. Fortunately, some of those variables may themselves be opportunities. Jesse Ransford is looking specifically at markets both upstream and downstream of AI as investment opportunities, as they’re likely to continue benefitting from the current AI development boom.
Looking upstream, AI requires an incredible amount of computing power, cloud storage, and energy—all things that already presented themselves as powerful investment opportunities. Companies involved in the manufacturing and supply of semiconductors, for example, are primed for heightened growth over the next decade. Power and cloud storage providers are similarly well-positioned, and may be worth investigating.
From the downstream perspective, companies willing to integrate AI into their workflows or customer experiences also stand to benefit, as the technology promises to grow output without increasing labor costs, and thus better margins. Higher profit margins translate directly into soaring equity returns, and that makes for a solid return on investment. As such, banks, consulting firms, law firms, and marketing agencies all stand as potential downstream opportunities during the AI boom.
However, there is always risk. There’s no predicting what way the regulatory winds will blow regarding AI development, implementation, and legal compliance, though the current administration appears uninterested in legal regulation. Additionally, the private nature of many of AI’s most noteworthy players—OpenAi, ByteDance, and Anthropic, to name a few—makes it difficult for individual or retail investors to buy shares, which forces investors to invest instead in the stakeholders of those private companies, like Microsoft. Alternative investment platforms may offer a solution to this specific roadblock through private venture funds. Given these confounding aspects of AI investments, Jesse Ransford is choosing to take time-honored investment advice to heart, and focus on a diverse portfolio.
“Diversifying investments across companies and sectors is extremely important to minimize risk,” he says. “That said, index funds are generally weighted toward the most valuable companies, which are likely AI-related in this day and age. The S&P 500 (NYSEARCA:SPY), for example, has roughly a third of its value invested in the Magnificent 7. This concentration exposes retail investors and passive 401K holders to AI gains automatically.”
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This is not investment advice. The content is for informational purposes only and should not be construed as a recommendation to buy, sell, or hold any security or financial instrument. All investments involve risk, and the past performance of a security or a financial product does not guarantee future results. Any investment decisions you make are your sole responsibility. You should consult with a qualified and licensed financial advisor, tax advisor, or legal professional before making any investment decisions based on the information provided.
