ChatGPT took the Internet by storm – Which AI stocks are worth looking at?

By Danish Lim, Investment Analyst, Phillip Nova

ChatGPT taking the Internet by storm

With ChatGPT’s success, it looks like the AI chat engine arms race is underway, with tech giants Alphabet and Microsoft both trying to outdo the other with their very own Chatbot AI. Investors have piled into AI-related stocks, with the Global X Artificial Intelligence & Technology ETF (Nasdaq: AIQ) gaining 15.07% YTD as of 13 Feb.

Since its launch in November, ChatGPT took the internet by storm, and has reportedly reached 1M users and 100M site views faster than any other platforms in history, even more than TikTok. Microsoft, who owns a stake in OpenAI, the creator of ChatGPT, announced plans to integrate OpenAI’s tech into its Bing search engine. Alphabet responded with their very own AI chat bot Bard. Alibaba also jumped on the ChatGPT bandwagon after Microsoft, Alphabet, Google and Baidu all announced plans to integrate AI into their business.

Impact on Singapore stock market

We believe the trend may spillover into the Singapore stock market, as the local government has been very supportive towards AI. The National AI Strategy, which was launched in 2019, aims for Singapore to become a leader in AI by 2030. MAS also offers grants for companies that adopt AI in their businesses.

Although we do not expect AI to be integrated in Singapore to the same extent as it is in the US, several stocks which have reportedly been investing heavily into AI albeit for different purposes are:

• Venture Corp Ltd (SGX: V03)
• AEM Holdings Ltd (SGX: AWX)
• Silverlake Axis Ltd (SGX: 5CP)

Outlook for AI-related stocks

We are bullish on the AI-chat bot market in the long-run, but expect it to take time to reach its full potential. We foresee a tough road ahead as it may take years before a company’s investment into AI can bear fruit. Therefore, investors looking to invest in AI-related companies need to remain cautious and be mindful of the short-term risks.

Speculators seeking profits have always flocked from one emerging trend to the next, pushing stock multiples to unsustainable levels. But in our view, Artificial Intelligence, like all major innovations before it, accomplishes the ultimate goal of making humanity’s lives more convenient. This is in stark contrast to past investing fads with very few compelling use cases.

In our view, AI chat bots have the potential to alter the search engine advertising industry that has long been dominated by Google. Google’s search engines comb the web for specific terms and lets users decide which information is useful. In contrast, ChatGPT is able to give detailed and human-like responses to questions on any topics, easily holding a conversation and answering any follow-up questions. We believe AI has the potential to revolutionize how people search for information online. This makes it a very real threat to replace traditional search engines such as Google in the future. On a macro level, it has the potential to make certain roles such as copywriting, journalism, and graphic design obsolete.

Nevertheless, do keep in mind that online advertising currently makes up roughly 77% of Google’s revenue; but only around 7% of Microsoft’s revenue. It will be difficult for Microsfot to pry advertisers away, as well as to change people’s habit of relying on Google. Hence, we think it will take time for Microsoft to be able gain substantial market share from Alphabet.

We are bearish on companies that venture into this business as heavy funding and cloud-computing power is required to run the complex algorithms that are needed for these chat bots to function. Even Microsoft had to spend heavily on OpenAI, having announced a $10B investment into OpenAI last month. Thus, there is a high barrier to entry which makes it hard for companies to venture into this business without years of prior investment and the necessary cloud computing infrastructure. In our view, it is likely that mega corporations will end up holding a monopoly over this business going forward.

At present time, the technology is still at a nascent stage. Its commercial viability and revenue model remain unclear. AI chat bots will take time to be fully commercialized and integrated into the economy. But we believe AI chat bots are here to stay; it separates itself from other investment fads as it has a tangible impact on people’s daily lives by changing the way we search for information on the internet and making our lives easier.

Risks for investors when investing in AI-stocks

An example of a risk would be Google’s underwhelming demonstration of its new AI chatbot Bard which gave inaccurate information. It resulted in the largest slide in Alphabet’s shares in over 3 months, wiping out around $100B in market cap. This clearly shows the risks of jumping onto the ChatGPT bandwagon. Inaccuracy and functionality issues are likely to result in negative headlines and cause shares of the related stock to tumble.

Investors should also be aware of potential regulatory risks. The technology has raised concerns about ethics, copyright protection, and academic cheating. The government may respond by cracking down on AI and limiting its usage to governmental agencies or corporations. We see this risk playing out largely in China, where state media newspapers have warned investors not to blindly join the speculation in AI-related stocks.

Lastly, companies may also falsely hype up their AI projects despite the lack of working prototypes or a proof of concept. Investors have to keep in mind that some of these companies are yet to have a viable profit model for their AI technology. After all, integrating AI into a business is pointless if the costs required to develop it is far greater than the profit it generates. There is a risk that investors may get caught up in the hype and invest blindly into any AI-related companies.

3 important questions to ask before investing in AI stocks

We recommend investors abide by the “Good businesses are good stocks” mantra. Investors should ask themselves 3 important question prior to investing into AI-related stocks:

1. How does the business make money from its AI technology?

2. Does the technology provide a competitive advantage?

3. If its AI investment fails, will the company collapse or does it have a business model that is diversified enough to help keep it afloat?

Some stocks in the AI-related space that are worth a look

In our view, there is still a long way to go for the large-scale commercialization of AI-related technology, as regulatory approval and monetisation methods are yet to fully materialize. Investors should remain cautious in chasing the recent AI-frenzy and not invest blindly. We suggest letting time run its course and waiting for the technology to prove its value to society. At the same time, we favour Big Tech firms like Microsoft as they have the necessary capital and infrastructure needed to support AI-related technologies.

However, please note that most of these AI investment initiatives are still in the nascent stage, and not much details are available at present time. Another way for investors to gain exposure to the AI-trend is to look into semiconductor-related stocks as they are needed to meet the computing power requirements required for AI to function. As seen in the US, the VanEck Semiconductor ETF has surged by +22.05% YTD, mainly because chips are seen as a complementary good to AI-related products. Thus, AEM Holdings & Venture Corp serves as proxies to the AI trend.

Venture Corp Ltd (SGX: V03): A leading provider of technology products, services and solutions. FY 2021 R&D expense is estimated to be at 19.33M.

• Management has stated in its 2022 annual report that the company was working on developing an artificial intelligence in-house programme. It would utilise machine learning technology to predict success or failure by analysing available data sets, producing actionable insights and enabling early detection. The company aims to enhance efficiency and productivity of its manufacturing sites by harnessing the power of AI.
• Also previously highlighted in its 2021 annual report that it will continue to increase its participation in the Robotics, Automation, and Artificial Intelligence (RAAI) segment to tap into new growth opportunities.

AEM Holdings Ltd (SGX: AWX): Provides semiconductor and electronics test solutions for semiconductor and electronics companies serving the advanced computing and AI markets. Successful adoption of more advanced semiconductors would require more rigorous testing to keep pace with rapid industry growth, as well as ensure reliability and scalability.