Weekly Wisdom – March 10, 2023

By Hightower Great Lakes on March 10, 2023

What Is Artificial Intelligence and Why Is It so Popular?

Hello? Is anybody home? If so, you have likely heard about the artificial intelligence (AI) craze that has taken the market by storm in the past few weeks. Dubbed the AI “Arms Race,” there has been a stark increase in the references to the buzz word recently.¹

So much so, that AI and synonyms of AI were mentioned 125 times during Nvidia’s (NVDA) hour long fourth quarter earnings call. This is due to the benefits that generative AI and machine learning offer to both corporations and individuals.

Microsoft and Google’s respective AI Chatbots, ChatGPT and Bard, are large language models (LaMDA) trained to compile gross amounts of data and provide users with a human-like interaction experience across search, communications, and workspaces.²

ChatGPT has been integrated by Microsoft into its search engine, Bing, while Alphabet is yet to integrate Bard into its search engine for public use. The main benefit of these large language models is the ability to create a more seamless and efficient experience.

Do not be mistaken though, as generative AI has uses that go far beyond search. Companies such as Microsoft (MSFT), Alphabet (GOOGL), Meta (META), Nvidia (NVDA) and Broadcom (AVGO), to name a few on an ever-expanding list, are poised to benefit from the shift.³

Company Involvement

While many companies are involved in AI development, their roles are not all the same. Alphabet, Microsoft, and Meta are companies that are using AI to improve and create products and experiences that will transform the way that humans interact.

Being that these companies are consumer facing, their innovations in the space are most likely to be noticed by the average consumer. As aforementioned, consumers are already able to take advantage of Microsoft’s ChatGPT and will soon be able to interact with Alphabet’s Bard.

Meta uses generative AI to offer Instagram and Facebook users new content; to aid its advertising business; and has recently built an “A-Team” that will focus on the generative AI, and likely focus on Horizon Worlds, commonly known as the Metaverse.⁴

Nvidia and Broadcom are two companies that design top of the line semiconductors used as the backbone for the AI engines that ChatGPT, Bard and the Metaverse need to function.

Broadcom CEO Hock Tan noted in their fiscal first quarter earnings call that what Broadcom is doing for AI is “critical and as important as the AI engines” themselves. The company did $200 million in Ethernet switch shipments in 2022 and expect that number to quadruple to at least $800 million in 2023 based on the high demand they are seeing.

Moreover, as Moore’s Law begins to reach its maximum threshold, more AI engines will be strung together in parallel to allow for faster processing, which requires even more semiconductors.

Is AI Overhyped?

All said, we remain in the early innings of the AI transformation. There is no exact number for the investment required to complete the AI shift. However, it is estimated that Alphabet has, at the low end of the range, invested $27 billion in AI since 2018.⁵.

AI also poses a risk to margins given the steep investment and possible cannibalization of other products.

Valuations of some stocks most heavily intertwined with the AI shift are largely overvalued. So much so that acclaimed growth style portfolio manager of ARKK Innovation ETF, Cathie Wood, has been selling shares of Nvidia which are currently valued at 53x 2024 earnings per share.

For reference, the Invesco QQQ ETF (QQQ), which tracks technology stocks in the Nasdaq Composite (CCMP) is valued at 23.5x 2024 earnings per share.⁶ While Meta (META) is up 54% YTD, the valuation is far more compelling at 16x 2024 earnings per share.

Remaining true to valuation discipline becomes increasingly difficult in times of extreme hype when emotion may become a driving force in investment decisions. However, it may be the case the AI trade has become overhyped, and even labeled a “FOMO trade,” short for fear of missing out.

We continue to remain weary of valuation pitfalls, while still investing where opportunities present themselves. Opportunities to capitalize on AI are more widespread in areas such as industrials and consumer discretionary where companies like John Deere (DE) is investing in precision agriculture and Starbucks (SBUX) invests in an AI based platform that streamlines labor and inventory.

Click here to read last week’s Weekly Wisdom (3/2).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

---

¹ Source: Goldman Sachs, as of February 8, 2023.

² Source: CNBC, As of March 3, 2023.

³ Source: Wall Street Journal, as of March 6, 2023.

⁴ Source: Reuters, as of February 27, 2023.

⁵ Source: Goldman Sachs, as of February 8, 2023. 

⁶ Source: CNBC, as of March 6, 2023.