What comes to your mind if you think of Artificial Intelligence? HAL in 2001: A Space Odyssey? The Terminator? Or maybe the intelligent machines in The Matrix? In the public perception, Artificial Intelligence is a future where machines have outstripped humans. Both in intelligence and ability. Artificial intelligence is no longer an idea of the future. It’s happening right now. But what should you know if you want to invest in artificial intelligence?
Investment in AI is booming. Forrester predicts that investment in AI will grow by 300% in 2017. And that insight-driven businesses, those that invest in AI, IoT, and Big Data, will ‘steal’ $1.2 trillion of business per annum from their competitors.
Successful investors are great at one thing. They can spot growing industries and technologies with the potential to disrupt current businesses. The wide range of applications for AI, coupled with the latest advances, has got investors excited about its prospects.
Could artificial intelligence be a good investment for you?
Let’s look at the industry in a bit more detail:
Artificial Intelligence Today
We have yet to create an AI with a general intelligence equal to a human. It’s unlikely this will happen in the foreseeable future. But artificial narrow intelligence is making huge strides. In artificial narrow intelligence, a computer specialises in one specific task. That’s why we’re now seeing driverless cars and mobile assistants like Siri for example. Or machines beating humans at Go (Google’s AlphaGo). And even Jeopardy (IBM’s Watson).
These AIs have a more narrowed, focused intelligence. But it doesn’t mean they won’t revolutionise their industries. Driverless cars, for example, will completely change the transport and delivery industry. Without drivers, the vehicles won’t need to take breaks. They will also drive more efficiently and will have fewer accidents.
This enormous potential is predicted to fuel massive growth over the next ten years. Tractica estimate revenue from the AI market was worth $644 million in 2016. They predict this will almost double in 2017. By 2025 they predict it will reach an incredible $36.8 billion.
Why should you invest in artificial intelligence?
So why should you consider investing in artificial intelligence? Well, there are a few reasons:
Growing industry with great prospects
As we’ve already demonstrated, the industry is growing fast. And it’s likely to continue doing so for years to come. Yet, competition is high among the different companies involved. With many businesses investing heavily in their R&D in a race to have the most advanced AI programs. Achieving this could bring a significant reward for those companies who are first to produce and use AIs that solve current problems in the market.
Many applications and high potential returns
We might refer to the AI ‘industry’. But artificial intelligence is a technology with applications in almost every industry. This is part of what makes AI so interesting and so investable. It has the potential to disrupt a huge number of existing businesses.
Over the next decade, we can expect to see improvements in a wide range of areas. Just a few of the many major applications that could become significant include:
Autonomous cars will improve safety and reduce traffic. Smart road networks with networked cars could be used. To optimise traffic flow and decrease traffic jams.
Low-cost sensing technologies will improve AI diagnostics. This has applications both at hospitals and at home. With wearable tech that alerts us off ill-health a real possibility.
AI-led security systems can use cameras to spot suspicious or strange behaviour. It can also track criminals automatically. Or push predictive policing, predicting where a crime is likely to happen.
AI will enable entertainment to become more interactive and personalised. Including through personalised companion robots, augmented reality, and virtual reality.
Intelligent Tutoring Systems (ITS) are already helping to teach students. And AI marking systems are helping MOOCs. With classes of thousands to grade papers with limited human interaction. Expect this to continue to expand. Especially at graduate-level where face-to-face teaching is less important.
As speech recognition and robotics improve, you can expect to see more uses for AIs in the home. This will be particularly important for elder care. As ageing populations put a strain on the ability of countries to care for the elderly.
Even if only a few of these promises are achieved in the next ten years? AI will still have revolutionised the way we live.
The companies that succeed are likely to provide high returns on your investment. As with any exciting new technology with many commercial applications. A small investment in the right company could be worth a small fortune in 10 to 20 years.
Established companies lower risk
Many of the key players researching AI are established businesses with other concerns. Take IBM for example. Besides AI, it also has other products. In data and analytics, IoT, IT security, IT infrastructure, and more. Investments in companies like IBM lower your risk. Because these businesses are already diversified. Even if their AI division fails to deliver on expectations? There are many other profitable products. Of course, this may also reduce profits in comparison to a smaller business focused solely on AI.
What are the risks when you invest in artificial intelligence?
As with any investment, there are also risks to investing in artificial intelligence.
Could we see an AI bubble?
Some commentators are comparing the current advances in AI to the early years of the internet. With excitement growing and investment booming. During the Dotcom bubble, initial success by a few companies stoked excitement. To the point where investors were putting money into any and every internet enterprise. Thereby over-valuating what many of them were worth. When the bubble burst? Expectations were brought back in line with reality. And many investors lost money.
AI has some of the same characteristics as the early internet businesses. Exciting new technologies and high potential. But for many, little commercial success (yet). What remains to be seen is whether an investment will outstrip value, forming a bubble.
The AI sphere is highly competitive. Consider driverless cars. Most people know that Google, Apple, and Tesla are some of the big names working on this problem.
But it’s much more competitive than that. As of August 2017, CBInsights identified 33 different corporations working on creating a solution. Besides the heavyweights already mentioned, you can add other big names. Including Microsoft, Uber, General Motors, Volkswagen, and Chinese search giant Baidu.
Other areas are similarly competitive. And it is unlikely that every company will be a commercial success. Unless you invest in a diverse portfolio (and even then), your level of risk is high.
How to invest in the artificial intelligence industry
There are two main ways to invest in the artificial intelligence industry. You can either buy shares in individual companies or buy exchange-traded funds focused on AI.
1. Exchange-traded funds for AI
Exchange-traded funds are securities that track an index, a commodity, or a basket of assets. In the case of ETFs for investing in AI, the ETF will own shares in a range of companies that are focused on AI. By investing in the ETF? You indirectly own part of these companies (although you do not have a direct claim on them).
ETFs enables you to diversify your portfolio. But with a specialised AI ETF you rely a lot on one industry. So if AI goes down as a whole? Your investment will almost certainly reduce in value.
When choosing an ETF, you should look for:
- A minimum level of assets (at least $10 million)
- A decent trading volume. This indicates that your investment has high liquidity. Which is important if you choose to exit.
You can search for AI ETFs online. You might want to investigate:
• Robotics & Artificial Intelligence Thematic ETF (BOTZ)
Invests in companies (mainly American and Japanese) working on robotics and artificial intelligence.
• Global Robotics and Automation Index (ROBO)
Decent diversification with 81 holdings; this fund invests in robotics and automation technology firms across the globe. Unfortunately, it does charge a steep fee. With an expense ratio of 0.95%.
• iShares Exponential Technologies (XT)
Diverse (199 holdings) ETF focused on a broad range of ‘exponential technologies’, many of which relate to AI: big data and analytics, nanotechnology, financial services. This fund has a low expense ratio of just 0.47%.
2. Investing in individual companies
Investing in specific companies is a higher risk strategy. Because you are relying on the success of just a few businesses. Specific investments in businesses should be part of a wider diversified strategy. This way you can lower your risk.
There are many websites offering ‘picks’ for stocks that you could invest in. But you should always make informed choices. Investigate the companies yourself and assess their value and potential.
Here is a small selection of industry players you might want to investigate:
• Google (GOOG)
Google search uses deep learning to understand search queries. Google Home is competing against Amazon Echo. And Google is also investing in driverless car technology. Its subsidiary, DeepMind, is a world leader in AI research.
• Tesla Motors (TSLA)
Heavily invested in artificial intelligence. Their vehicles can already park themselves and drive on the highway. Tesla has its sights set on autonomous driving.
• Apple (AAPL)
Apple is investing in the AI that powers Siri, its virtual assistant. It’s also working on its own driverless electric vehicle.
• Nvidia (NVDA)
Creates chips designed for deep learning and AI, supplying more than 80 automakers.
Wrapping it up
The artificial intelligence industry is exciting, fast-growing, and offers fantastic potential for investors. The biggest firms are household names. But there are many smaller businesses to investigate. And the fast-moving nature of the industry? It means new opportunities keep appearing.
We recommend that self-directed investors start out with an ETF to reduce their risk. You can also choose to invest in specific single companies. But unless you do so as part of a more diverse portfolio? Your risk is high.
Whichever method you choose, never invest more than you afford to lose. Every investment carries risk.