Artificial intelligence is the next big thing, and everyone wants to be a part of the action, no matter the effort.
Take Kroger (ticker: KR). The grocer mentioned AI eight times during its earnings call last Thursday, after mentioning it zero on the previous March earnings call. The company explained how AI would allow it to better substitute products, understand what customers want, and create better search results, but unfortunately the market shrugged. Kroger stock fell 2.7% on the day amid concerns that falling food prices would impact sales.
Kroger wasn’t the only company to report earnings and mention AI over the past week. Homebuilder Lennar (LEN) promoted something called the “Lennar Machine,” which combines the company’s “digital marketing platform and … dynamic pricing model” to further increase sales volume. It could be the place “where the much-discussed AI could find its way into the sometimes sluggish homebuilder industry.” Lennar stock rose 4.4% on Thursday, but likely because it comfortably beat earnings estimates and has a strong forecast offered for the next quarter.
Look, we got it. As everyone knows by now, stocks with direct AI exposure have led the way this year, from Nvidia (NVDA), which nearly tripled in value in 2023, to C3.ai (AI), which nearly quadrupled . And until recently, it was pretty much the only thing pushing stock prices higher. We too would like to jump on the AI train as long as it doesn’t cost us our jobs.
But picking the winners might not be as easy as it looks. While Nvidia is an obvious vendor — and the chip market is already reaping the financial benefits that come from its huge lead over almost everyone else — others still have a lot of catching up to do. Advanced Micro Devices (AMD), for example, last week detailed its plans for new processors that would compete with Nvidia’s. It remains to be seen if the strategy will work, and some analysts weren’t thrilled. “We’re left out as AMD’s AI vision proves itself,” writes Oppenheimer’s Rick Schafer, who has a perform rating on the stock.
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Even the winners may not be the winners. Morgan Stanley strategist Edward Stanley points out that investors tend to forget Amara’s Law, which states that people overestimate the impact of new technologies in the short term but underestimate their long-term effects. Also, most AI winners are likely to be private companies that most investors don’t have access to yet.
Stanley monitors search traffic for signs that generative AI can circumvent this cycle. If people continue to search for ChatGPT and similar products, it would be a sign that demand is high. So far so good, but AI imaging products that preceded ChatGPT have seen search volume fall by half since their peak and could be a leading indicator for text-based devices.
With so much unclear, Société Générale strategist Manish Kabra argues that investors should use a basket of stocks to bet on continued gains in AI that’s broader than AI-focused exchange-traded funds, which have seen 30% inflows this year compared to almost none for equities in general. It also meant large sums of money have been poured into individual names, including Nvidia, Microsoft (MSFT), Autodesk (ADSK), and Alphabet (GOOGL), which are among the stocks featured in most AI ETFs.
The SG Rise of the Robots/AI Index comprises 150 stocks, including companies from the semiconductor, application and systems software and machinery sectors. The basket includes everything from well-known beneficiaries like Adobe (ADBE) and Datadog (DDOG) to conundrums like Delta Air Lines (DAL) and Boeing
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(BA). A basket also helps mitigate the influence of companies trying to position themselves as beneficiaries of the technology. “Investors need to digest the waves of AI regulation and the risks of ‘AI laundering,'” writes Kabra. “We prefer a diversified approach to AI investing over concentrated allocations.”
However, sometimes it pays to think about companies that no one thinks about — like utility companies. Jefferies’ Aniket Shah, for example, argues that the challenges facing the US power grid are enormous and growing as demand for electricity increases and supply of electricity comes from sources such as wind and solar, which may prove unstable. With this in mind, AI could make the difference between a blackout and a blackout. “The grid system needs to significantly improve the ability to decide exactly how much power to generate, from which sources and at what time of the day,” writes Shah.
AI wouldn’t be a reason to buy utilities right now – just like it wouldn’t be a reason to buy Kroger or Lennar – but they might still be worth owning. Utilities Select Sector SPDR ETF (XLU) is down 4.4% this year after dividend reinvestment as investors shunned anything that seemed too safe. But Jay Kaeppel, senior research analyst at Sentimentrader.com, notes that the sector has four things going for it. First, utilities have generally outperformed the S&P 500 index on trading days 109 through 197 of the year, also known as summer. Insiders also bought shares as they experienced a washout. And if investors stop worrying about where bond yields are headed, it could give utilities a boost, too. “Utilities are rarely an exciting place to invest,” writes Kaeppel. “But like any other sector, there are times when this sluggish sector can be a relatively good place to be.”
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With AI fever high, this could be one of those moments.
write to Ben Levisohn at [email protected]