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Like a lot of people, I have been thinking over the past couple of years about the best stocks to buy to take advantage of the booming demand for artificial intelligence (AI).
Here are three different approaches I think could be worth considering when hunting for potential AI-related bargains in the stock market.
The old gold rush principle
From AI to the dotcom boom, the gold rush to tulip mania (yes, tulips!), history is full of frenzied speculation when a seemingly attractive product or technology grabs the public’s imagination.
One old stock market saying is that when there is a gold rush, buy the company that sells shovels. The logic here is simple. Some miners could do very well in a gold rush – but many will not. However, each will each need tools to mine for gold.
So while selling shovels may have low profit margins compared to successfully striking gold, it could be a less risky activity thanks to a large customer base.
Within the AI landscape, companies like Nvidia and Taiwan Semiconductor Manufacturing Company provide the equivalent of shovels. In the past five years, those two shares have soared 1,495% and 283% respectively.
Show me the money
A different strategy would be ignoring the initial gold rush altogether. Why try to figure out what stocks to buy now hoping they will benefit from how AI develops? An investor could sit back and let the AI landscape develop more clearly before making any move.
That approach of waiting for a business to prove its model could mean missing out on some shares’ surging prices. But it might also mean avoiding shares that are massively overpriced because of an overly optimistic expectation of what AI will mean for their business.
Amazon stock soared 3,775% between June 1997 and January 2000, the peak of the dotcom boom. So did investors miss their chance if they did not ride that wave? Not at all!
It fell 90% by the following September – only to gain 73,387% between then and now! Waiting for a business to prove itself before investing does not necessarily mean missing out on brilliant opportunities.
Looking at your own experience
One share I have been following is Google parent Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). At a price-to-earnings ratio of 20, I have not yet added it to my portfolio. But I might if I had spare cash to invest and believe it is worth considering.
One risk that has been weighing on Alphabet’s share price is AI. Many investors fear it will decimate Google’s search business as tools like predictive suggestions mean they do not even need to ask questions in the first place.
But is that the case? We do not know. But my own experience so far makes me doubt it. I do not use Google any less since AI became more mainstream. Meanwhile, the search engine’s AI snippets annoy me. I notice that they sometimes get even some basic information wrong.
In an AI world, a vast trove of information is valuable – something Google has. Meanwhile, AI means booming demand for data storage. Alphabet has it in droves.
It is important not to think all end users are like you. But reflecting on personal usage experience can help the hunt for stocks to buy.
