Investors need to use caution around AI stocks

The current artificial intelligence (AI) boom looks like another market mania however the ultimate beneficiaries of technological changes remain uncertain therefore investors should use caution when choosing their investments in tech stocks, according to Pendal.

Portfolio manager of the Pendal Asian Share Fund, Samir Mehta, has said the winners of technology’s disruption will be ‘quite diverse’ and ‘not always apparent early on’ and the technology’s very success could curtail demand.

“Many AI services are priced on a per-user licence, leading analysts to create long term industry revenue forecasts by assuming a take-up rate among employed people.

“But if AI succeeds in its promise of making business more productive, companies will reduce staffing,” Mehta noted.

“The effect of raising productivity is going to mean fewer people will need that software because fewer people are employed.”

Following this, investors should focus not on whether the transformation will occur, but when and at what cost — and who might benefit. According to Pendal’s Asian Share Fund’s portfolio manager, when it comes to AI people often forget about the fact that the full benefits will take years before they materialise.

This was stressed by Microsoft recently which disappointed investors last month when it cautioned that revenue growth from AI would be gradual, but spending would be aggressive.

Microsoft invested US$10 billion in OpenAI, the high-profile creator of ChatGPT, which has sent its shares up 40% this year.

Also, Taiwan Semiconductor Manufacturing Company, which makes silicon chips for companies like AI giant Nvidia Corp, was up more than 20% this year as investors backed its exposure to the AI boom.

However, similarly to Microsoft, TSMC also confirmed that AI accounted for just 6% of its revenue, with the balance of sales coming from making chips for laptops and phones — a market that is not expected to grow, according to Mehta.

“There are many other examples — companies like Quanta Computer and Wistron Corp make the servers that mostly go into data centres for the operations of cloud businesses,” he added.

“Only a small part of it is being used for AI-related services. But just that association has meant that even though growth is negative in 2023 — and expectations for 2024 and the perception that demand for AI-related servers is high — some of these stocks have doubled in the last two or three months.

“[And] That’s a speculative fervour.”