Finding Opportunities in Hype: The Generative AI Boom Shows No Signs of Slowing on Wall Street

With the arrival of a landmark debt-ceiling deal in the US, we’re already seeing an influx of investor confidence returning to Wall Street.

With generative AI on investors' minds worldwide, it appears that artificial intelligence stocks will be best positioned to reap the rewards of this upturn in fortunes for the market.

The S&P 500 has already reached new heights that haven’t been seen since August 2022, and there may even be hope that the index can recapture much of its lost momentum in the wake of the fierce economic headwinds of 2022.

At the forefront of this growth appears to be stocks exposed to generative AI platforms. “Many UBS sector analysts think that generative AI (i.e., AI that can create text, video, etc.) has the potential to intensify competitive pressures, with 18 of 32 teams expecting this outcome, while 19 see the potential for higher revenues,” claimed a team of UBS analysts fronted by Michael Briest. “All but one (Internet) see an opportunity for cost reduction.”

According to Guardian data, the rise in investor appetite for AI stocks has contributed to a $4 trillion rally in tech stocks in 2023.

The move has seen the combined value of technology firms listed on the Nasdaq Composite index total $22 trillion alone, which is up from $18tn at the end of last year.

This means that the rise of artificial intelligence and generative AI has contributed 23% to the Nasdaq Composite over the first half of 2023.

Despite significant growth in AI-facing companies on Wall Street, many leading generative artificial intelligence firms like OpenAI are yet to go public. This can make it more tricky for investors to add relevant stocks to their portfolios.

So, how is such a new industry comprised largely of startups driving investor interest?

Buying Into Generative AI

The world of generative AI is attracting investor interest even despite the economic headwinds of 2022 continuing to persist throughout the year.

“Although technology stocks have been hit hard in the market, the recession could open up opportunities for growth,” explained Maxim Manturov, head of investment advice at Freedom Finance Europe. In particular, software, AI and cybersecurity are expected to thrive once interest rate hikes have stopped.”

One of the leading stars of the generative AI boom has come in the form of ChatGPT, an application that’s capable of creating high-quality text and multimedia content in response to user prompts.

While the developer of ChatGPT, OpenAI, isn’t publicly traded, we’re still seeing the firm represented in the stock market through Microsoft (NASDAQ: MSFT), which holds a significant stake in the company.

For investors seeking to buy into the AI landscape, there are many firms that have benefited from the emergence of generative AI by facilitating the technology.

Semiconductor makers like Nvidia (NASDAQ: NVDA) and software developers have seen their share prices rapidly increase as traders continue to bet on the wider growth of the industry.

Nvidia’s growth in 2023 has been seismic. The stock has rallied more than 170% in 2023 alone and is expected to become the latest trillion-dollar company on Wall Street. Such is the furor surrounding Nvidia that the stock has already far surpassed its 2021 peak value.

Although Nvidia doesn’t directly create generative AI software, it’s believed that the company will support the growth of the industry with its own suite of technology geared towards making an AI-based ecosystem possible.

Building More Direct Generative AI Exposure

While it’s hard to look past Nvidia as one of the biggest winners from the generative AI boom on Wall Street, some other firms that are taking more of a hands-on approach to AI can also offer investors some more direct exposure to the industry.

One example of an AI firm that wasted no time in going public was C3.ai (NYSE: AI), which is an enterprise AI application software company specializing in SAAS products serving customers like Bank of America, Koch Industries, Baker Hughes, and the US Air Force among other key players.

Boasting the ticker symbol, AI, C3.ai has recorded gains of over 200% in the first half of 2023 and posted better-than-expected results over Q2 of the year.

With a market cap of $3.8 billion, there’s plenty of room for growth should C3.ai continue to build momentum at such an impressive rate.

Furthermore, the stock still sits more than 70% adrift from its post-IPO pop in late 2020, which indicates that more ambition could be facilitated by the company.

Another firm worth looking out for is Baidu (NASDAQ: BIDU), which is a Chinese tech company operating as the largest search engine in the country.

Having launched its very own AI chatbot, called ERNIE bot in English and Wenxin Yiyan in Chinese, Baidu has emerged as a useful player as an AI-facing stock based overseas.

Given that Baidu has struggled to build stock market momentum in the wake of a 2021 peak, investors may be best off monitoring how the firm’s recent AI integration can help to bring better market fortunes before opting to buy.

Keeping Mindful of Hype

With popular AI-facing Wall Street stocks like Nvidia and C3.ai posting major price rallies in 2023 amidst the generative AI boom, it’s important for investors to remain wary of this latest iteration of tech-related hype.

The trigger for this investor appetite for generative AI stocks has been the launch of ChatGPT, and the successful rollout of the app has paved the way for rapid growth throughout the sector. With this in mind, it’s imperative that investors exercise caution.

As a new technology that’s still in its infancy, there is a great danger of projects failing to make the grade as new alternatives enter the market.

With this in mind, even if generative AI can continue to strengthen, there’s no guarantee that the best stocks of today are going to continue to lead the market tomorrow.

Mark Hawtin, investment director at GAM Investments, believes that the AI hype cycle has already eaten into the options available to investors today.

"There's a question about where we are in that curve with AI, where the hype is so visible," Hawtin warned. "There are ways to get exposure to the (AI) theme without picking something that is highly valued."

With this in mind, any investors seeking to add generative AI exposure to their portfolios should approach the industry with caution. However, there are certainly opportunities out there for those seeking to adopt more long-term investments.

As always, plenty of research and a keen eye for industry developments can pave the way for a more sustainable portfolio.