Artificial intelligence (AI) is going to be a theme that drives markets over the long term but investors run the risk of placing bets on the wrong companies if buying too early, according to Bankers Investment Trust manager Alex Crooke.
Money has poured into leading AI companies this year, with the likes of Nvidia soaring a whopping 218.4% in 2023.
With the US economy in a precarious position and earnings potentially at risk, Crooke told Trustnet in July that he fears this year’s AI winners could come crashing down.
“That risk has been priced in to most stocks but there’s this subset of anything AI that has just gone through the roof because people think it’s the only game in town,” he said. “We think some of that enthusiasm will wane as reality kicks in.”
Share price of Nvidia in 2023
Source: Google Finance
Nevertheless, Crooke still sees the necessity in having exposure to AI for the long-term good of the trust’s returns.
That is why he added five stocks to the £1.2bn portfolio that he expects to benefit from AI, regardless of who the biggest winners turn out to be.
“We are cognisant of not being too early on what is still a developing technology and mindful of our commitment to grow the trust’s dividend and deliver long-term capital growth,” Crooke said.
“To bridge the gap, we have narrowed our criteria in this area so that we specifically invest in companies that may be early beneficiaries of the adoption of AI but are also well run, cash-generating businesses that have the capital necessary to advance this technology while generating strong margins from their core businesses.”
Microsoft
Microsoft was one of the ‘magnificent seven’ who led the Nasdaq 100’s 35.3% return this year amid the AI rally, with its share price climbing 39.5% in 2023.
Nevertheless, Crooke said the $2.5trn giant has room for a lot more gains ahead as AI transforms global markets.
It was an early adopter of AI, first investing $1bn in ChatGPT creator OpenAI in 2019, which has since grown into a multi-billion dollar strategic ownership stake over the ensuing years.
Share price of Microsoft in 2023
Source: Google Finance
By incorporating generative AI into its services, Crooke anticipates Microsoft to generate $1bn in AI-related revenue this year, with further integration set to improve its offerings over time.
It is currently the highest-conviction name in Bankers, with Microsoft accounting for 3.8% of the trust’s 192 holdings.
TSMC
Those who worry about Nvidia’s overzealous share price hikes may want to consider the Taiwan Semiconductor Manufacturing Company (TSMC) instead, according to Crooke.
It is the manufacturing partner of Nvidia – the leading designer of highly sought after GPU technology – meaning investors could benefit from demand without direct exposure to the company.
Crooke admitted that AI-related chips only account for a small percentage of its sales at present, but it has the potential to become the fastest growing division within the company.
Shares climbed 21% this year, but Crooke said it has some way to before recovering from its 38% drop in 2022, creating a tactical entry point for new investors.
“After a year of cyclical slowdown the stock is trading at a very attractive valuation, which has yet to factor in the benefit the company can expect from AI and other growth areas within technology,” he added.
Share price of TSMC in 2023
Source: Google Finance
ASML
Another semiconductor company set to benefit from the ramp up in demand for AI infrastructure is ASML, according to Crooke.
Rather than manufacturing chips directly, it creates the machines that produce semiconductors, giving investors indirect exposure to the emerging theme.
“The advancement of AI systems depends on the continual performance improvement in chips,” Crooke said. “This is where ASML’s design work is essential.
“The holding was initially bought as a way to benefit from the proliferation of semiconductors in multiple industries, but now has the added benefit of being squarely exposed to investment in AI.”
RELX
Crooke’s first three picks have a direct tie to the ever-increasing demand for AI, but RELX is a company he sees benefiting from more AI integration.
The British multinational, which provides analytics services for businesses, could have its model made significantly more efficient by adopting AI.
He said: “With a wealth of proprietary data in the legal and insurance industries, coupled with its recent focus on developing generative AI tools, the company should be able to assist its clients and derive significantly improved productivity.”
Accenture
Accenture is another company Crooke said is set to benefit from growing AI integration. The Dublin-based company helps businesses build their digital brand and optimize their operations.
Crooke said: “Accenture is well positioned to assist non-tech companies understand how best to deploy this technology and implement it into their existing infrastructure.
“Beyond AI the company is also critical in helping clients understand how to deal with issues like migrating into the cloud and implementing cybersecurity.”
It is not just non-tech companies that Accenture assists – it has a number of big name clients such as Microsoft, Google, Amazon Web Services and Adobe that it consults.
“We are not investing in startups or unprofitable businesses in this area [AI], and instead prefer to gain exposure through established industry leaders that are prudently investing in use cases that can be monetised,” Crooke added. “This is an investment for tomorrow, with today in mind."