Artificial intelligence (AI) helped revive many tech stocks earlier this year. After the 2022 bear market led to the worst tech sell-off since the financial crisis, the appearance of OpenAI's ChatGPT revived interest in AI stocks.
Still, companies such as Google parent Alphabet claimed to be an "AI first" company in 2016. Also, Apple has funded research in AI and machine learning for years, and many others have capitalized on the technology for several years.
With AI long serving as an under-the-radar trend, you might wonder whether it is one of the great investing opportunities of our lifetime, or if it will fall short of other significant historic chances to drive returns.
Data sources: Stanford University, S&P Capital IQ, Crunchbase, NetBase Quid.
The effect of revolutionary technologies
Despite AI-driven gains of past years, you might see where AI could become one of the greatest investing opportunities yet, or perhaps the greatest. Over the last quarter-century, the internet helped spawn today's largest tech companies.
And history shows how innovation can create massive amounts of value. The debut of Apple's iPhone took the internet to another level. At the time of that launch, Apple had a market cap of $105 billion. Today, its market cap stands at almost $2.9 trillion, and since the iPhone makes up just over half of the company's sales, that is approximately $1.5 trillion in market value in smartphone-generated revenue, not counting other companies built around this technology.
Admittedly, AI is not the only area of innovation. Cathie Wood's Ark Invest, which has holdings in many types of innovation, named AI one of 14 transformational technologies. These include gene editing, battery technology, autonomous driving, robotics, and cloud computing.
Still, Grand View Research predicted a 37% compound annual growth rate for AI by 2030, making it a $1.8 trillion market by that year. And since other technologies depend on AI, it should contribute to investor returns in many areas.
Creating value in AI
Furthermore, Wood has implied that Grand View's AI prediction might be too conservative. Ark Invest has made Tesla (TSLA 0.54%) its largest holding, likely because of AI. Tesla has almost attained an $800 billion market cap advancing EV and battery technology and has developed its own AI technology to power robotaxis.
Due to the potential for the robotaxi platform, Wood and her team predict Tesla will reach $2,000 per share by 2027. The AI stock trades for about $250 as of the time of this writing. So if that prediction comes true, Tesla's market cap will exceed $6 trillion, more than double the present market cap of Apple. It would almost amount to more than $5 trillion generated by AI within one company.
And that does not include Wood's investment in AI stocks like Nvidia (NVDA -1.91%), which dominates the market for AI-ready GPUs. That implies that Tesla might not be the only company to create trillions of dollars in AI-driven market value over the years.
How AI could fall short of expectations
However, despite its massive potential, AI could end up disappointing investors. For one, one of its critical technologies, the robotaxi, is fraught with potential issues since technical deficiencies could become a life-and-death matter. If investors hear about a robotaxi that did not see a pedestrian or an obstacle on a road, it could reduce confidence in the technology.
Ark Invest's Tesla investing thesis does not appear to account for such a possibility. If not adequately addressed, this could undermine the Ark Invest thesis on Tesla and its other AI stocks, meaning trillions in anticipated shareholder value may never materialize.
AI also needs to be checked for accuracy. Previous versions of ChatGPT did not incorporate any data collected after 2021, a problem that often resulted in incomplete or inaccurate data. The latest version partially addressed this issue, but it still opens the possibility that such apps are not considering all the data sources when performing information queries or attempting to draw conclusions.
Moreover, one of the key features of machine learning (ML), a segment within AI, is its ability to learn from mistakes. Still, becoming smarter is not going to mean it will surpass human creativity, a limitation that could prevent AI from reaching its full potential. Thus, the need to retain human capital to stoke creativity could wipe out some or all of the expected financial savings from adopting AI.
Making sense of AI's future
Given AI's potential, it looks like it will become one of the more significant investing opportunities known to investors.
Admittedly, the internet and smartphones were also transformational, and other technologies (including currently undiscovered ones) will probably generate considerable shareholder value. Moreover, AI could still make devastating mistakes, and data access could negatively affect the accuracy and value of its conclusions. Such challenges and the need for creativity will likely change the need for human capital rather than replace it.
However, the fact that so many older and emerging technologies depend on AI could make it an essential application. That likely means that every growth investor should own a position in an AI-driven innovator.
