When it comes to investing in artificial intelligence, investors have options other than aligning themselves with the Nvidia hive mind.
The companies driving the AI revolution — pick and shovel players like semiconductor stocks — have been some of the biggest beneficiaries of late, at the expense of other categories like software companies. Indeed, that’s helped propel flagship company Nvidia, and the market as a whole, to new highs.
But sticking only to winners means investors will have to pay even higher valuations in an already quite expensive sector.
The alternative, of course, is that “not holding AI or taking a position against AI entirely will be difficult for many,” Citi analyst Drew Pettit wrote. “We continue to suggest investors lock in profits in high-growth AI stocks, particularly enabler stocks, and rebalance into broader AI stocks across the value chain.”
Pettit believes we’re not in an AI bubble because things aren’t overheating enough in the long run: “The difference with the tech bubble and the post-COVID bubble meltdown is fundamentals. In our estimates, stocks suggest high expectations, but long-term consensus estimates suggest most are achievable. Fundamentally, sentiment is very optimistic, but we don’t seem to be on the verge of a full-blown bubble.”
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In fact, he sees a number of AI-related stocks whose projected share prices are rising without a commensurate upside in 2024. Leading the list of these stocks, which Citi rates as a buy with a rerating of less than 10%, is Airbnb.
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Apple, Toyota
,
Digital Realty
,
Service Now
,
visa
,
Honeywell International
,
SS&CT Technologies, HubSpot
,
Autodesk
.
Still, investors who don’t want to short AI entirely but want to broaden their exposure away from the theme still have options: Citi has a basket of hedging stocks with low correlation to AI, with insurance company Hartford Financial leading the group.
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Chub
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Allstate
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Everest Group
,
Along with consumer brands such as Kraft Heinz and Lowe’s
of
as well as energy companies such as Oneok and Shell.
.
But ultimately, Pettit believes the rally, while understandably worrying to some, isn’t over for good: “It would be remiss of us not to express our displeasure with the extent to which stocks have risen since May. Extending the gains from skyrocketing stocks to other areas of AI trading is our favorite way to express our positivity on the subject.”
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Other strategists are taking a similar approach: Capital Economics argued last month that rotation is better than avoidance when it comes to AI, while DataTrek believes there is still room for upside even among mega-caps.
For now, the AI rally shows no signs of slowing, but investors have options beyond the usual stocks.
Email Teresa Rivas at teresa.rivas@barrons.com.
