Investments in stocks that many expected to reap huge benefits from artificial intelligence (AI) reached an almost irrationally exuberant pace in 2023. However, this has not provided equal returns for investors in 2024. The buzz and trading volume surrounding nearly any stock with an AI narrative, which peaked near the start of 2023, have vanished.
While some AI companies keep rising, others have failed to meet the high expectations of investors.
AI Boosts Tech Sector, NVDA Leads
The rise of AI has been a major catalyst for growth in the tech sector, with companies like Nvidia (NASDAQ:NVDA) leading the charge.
The chipmaker’s stock has more than doubled in value this year, after more than tripling in 2023, thanks to the massive demand for its graphics processing units.
Struggling to Meet Expectations
Some tech companies have gone in the opposite direction. Salesforce (NASDAQ:CRM), Snowflake (NASDAQ:SNOW), Intel (NASDAQ:INTC), and Adobe (NASDAQ:ADBE), once considered large-cap stocks, have seen their market cap plummet after strong gains in 2023.
These companies have struggled to deliver on the bottom line, failing to meet the high expectations set by the market.
Filtering for the Eventual AI Winners
According to Stuart Kaiser, head of US equity trading strategy at Citigroup (NYSE:C), AI is still an investment theme and attracting money, but “Just saying ‘AI’ 15 times is not going to cut it anymore.”
This sentiment is echoed by Mona Mahajan, senior investment strategist at Edward Jones, who says, “Investors are looking a bit more at the earnings story among ‘AI’ names. The differentiator with something like a Nvidia is they have delivered on the bottom line, showing real data.”
AI-Washing Hype is Washed Up
Recent declines in AI-related stocks indicate that investors are now looking past optimistic commentary if the companies cannot back up their claims. This is a clear sign that the market is becoming more discerning in its approach to AI-related investments.
This trend is apparent in investment funds that aimed to select a broad range of AI beneficiaries, where over half of the individual stocks in BlackRock’s Robotics and Artificial Intelligence ETF (NYSE:IRBO), Invesco’s AI and Next Gen Software fund (NYSE:IGPT), and First Trust and Nasdaq’s Artificial Intelligence and Robotics ETF (NASDAQ:ROBT) have declined this year.
Key Takeaway
While the AI revolution is a game-changer for many companies, investors must carefully choose their AI investments. Simply mentioning AI in earnings calls is no longer enough to drive strong performance. Companies must show how they’re using AI to grow and increase profits.
As the market becomes more discerning, companies that can’t deliver on the bottom line will continue to struggle, while those that can should reap significant rewards.
