Opinion: AI, software and semiconductor stocks are too popular for their own good

There are still great opportunities to invest in AI’s potential. In an April 2023 column, I remarked that AI would be “a multi-trillion dollar revolution.” At the time, I noted that some of the best AI companies included Nvidia, Alphabet
GOOG,
-1.22%
and perhaps Microsoft
MSFT,
+0.45%.
I also cautioned against owning smaller-cap AI stocks including C3.ai 
AI,
-2.98%,
Sprinklr CXM
CXM,
+2.99%,
 BigBear.ai BBAI
BBAI,
+2.98%
and SoundHound.ai SOUN
SOUN,
-18.67%
— and still do.

I have been a believer in the AI revolution since I started buying Nvidia and wrote about it for MarketWatch back in 2016. We want to continue to invest in this amazing revolution, but it feels now like a crowded trade. We don’t want to fall into the trap of thinking that every tech company which mentions AI is a good investment. So let’s go through key underlying trends empowering the AI revolution and find the best companies to invest in for the long term. 

First, it is clear that the most important AI companies are all racing to be the first to achieve artificial general intelligence (AGI). The most likely winners: Meta Platforms
META,
+2.48%
or Tesla
TSLA,
+0.38%.
Both of these companies are spending huge amounts and giving their best and brightest employees the task of building AGI for their in-house use.

The current limiting factor for AI is computing power. Meta and Tesla are dedicating their compute power to training their own AI models. This differs from Microsoft, Amazon.com
AMZN,
+0.83%,
Oracle
ORCL,
+1.88%,
and even Alphabet, which are selling their valuable compute resources to third parties for AI training. This results in near-term revenue for these companies, but we think AGI will be the most valuable technology ever created and the cloud providers will regret not having dedicated more of their resources to being the first to figure out AGI. 

Casting a wide net

We’ve come across a few other companies that could be major beneficiaries of the AI revolution. We like Autodesk
ADSK,
+2.54%
(the maker of engineering software AutoCAD. Its unique and massive dataset consists of plans, drawings, blueprints and designs that the company can use for a generative AI program that will increase the productivity and creativity of engineers and architects.

We’ve also own Cloudflare
NET,
+1.40%
because its network of edge servers will be used to power the inferencing part of AI all around the world more securely and at much lower latency than the alternatives. We also own Intel
INTC,
+1.79%
and Taiwan Semiconductor Manufacturing
TSM,
+4.06%,
as we think these companies will be the only companies on the planet with the foundries capable of building the advanced chips needed to power AI. 

That said, most AI, software and semiconductor stocks are a crowded trade right now; probably there’ll be a chance to buy at lower prices in the coming year. One of the keys to long-term investing is not overpaying for stocks when they get bubbled-up valuations. Remember that during the dot-com bubble, great companies such as Microsoft and Intel reached truly astronomical stock-market valuations, and it took many years for investors to earn a return if they bought in at the 2000 highs.

We will continue to hold our huge long-term winners including Nvidia, Alphabet, Meta Platforms, Taiwan Semiconductor and Tesla, as these companies are at the cutting edge of AI. We’re excited about the prospects for Autodesk, Cloudfare and Intel. And we will also be on the lookout for the next Nvidia, Alphabet, Meta Platforms, or Tesla.

Disclosure: Willard and/or the 10,000 Days hedge fund are net long META, GOOG, AMZN, TSLA, INTC, TSM, ADSK, NET, NVDA and net short AI. Positions can change at any time and without notice.

More: Look out, Super Micro: Dell is cementing itself as an AI play too

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