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Investors must be prepared to balance their investments, understanding that they’re at the beginning of a long cycle.MARTIAL TREZZINI/The Associated Press

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Technology luminaries say that artificial intelligence (AI) will change the world. It has certainly changed stock markets. Nvidia Corp.’s NVDA-Q stock is up about 180 per cent since the end of November, when OpenAI launched version 3.5 of its ground-breaking ChatGPT generative AI.

How should investors invest in AI now? Rather than chasing explosive short-term profits, experts say it’s time to play the long game.

AI’s big splash in the past few months is just the beginning, says Alison Porter, portfolio manager at Janus Henderson Investors in London, U.K. Big tech companies have been involved in other forms of AI such as machine learning for a long time, but the new breed of generative AI seen in ChatGPT is a huge leap forward.

“It’s most definitely the next computing wave, and we have only seen those waves every 15 to 20 years,” she says. They began with the mainframe, and then the introduction of the PC. Mobile was the most recent long-term cycle in tech, and AI is the next.

These computing waves start with an inflection point in the evolution of a technology, she explains. The PC took desktop hobby computers mainstream. The iPhone was a turning point for a nascent mobile device industry. Each of these landmark moments sparked a longer-term flurry of growth across multiple subsectors.

For example, the iPhone ushered in a new ecosystem of app and game developers, online services, and communication services, providing plenty of further investment opportunities.

Ms. Porter believes the same thing will happen with AI. The technology will be important enough to spark diverse investment opportunities across the tech industry.

Semiconductors are just the beginning

Nvidia, whose impressive earnings guidance boosted it beyond a US$1-trillion market capitalization in May, has been the darling of the AI semiconductor market. However, Allan Small, senior investment advisor with Allan Small Financial Group at iA Private Wealth Inc. in Toronto warns the stock is currently an expensive proposition.

“You don’t want to go chase a company that you know that has astronomical valuations,” he says.

There are more opportunities in the semiconductor market, ranging from networking and memory vendors to CPU companies such as Advanced Micro Devices Inc. AMD-Q, according to Tejas Dessai, research analyst at Global X ETFs in New York.

But semiconductors are just the first stage in a longer investment cycle, he says.

“Beyond that, the second phase will focus mostly on infrastructure service providers such as Microsoft Corp. and Amazon Web Services Inc., that provide AI as service solutions,” he adds.

Global X offers two passive AI-focused ETFs. Robotics & Artificial Intelligence ETF BOTZ-Q, which focuses on industrial and consumer robotics and AI hardware. While Artificial Intelligence & Technology ETF AIQ-Q is broader, focusing on software companies that develop AI for internal purposes and those that apply AI as a service model.

Mr. Dessai also sees medium-term investment opportunities in data infrastructure companies for those interested in capitalizing on AI. He mentions companies like programming communications firm Twilio Inc. TWLO-N, customer relationship management giant Salesforce Inc. CRM-N, and workflow management company ServiceNow Inc. NOW-N, all of which are already using AI to help make their software more productive for enterprises.

Jas Jaaj, managing partner for AI and data at Deloitte Canada in Toronto, sees another AI-related investment opportunity stage beyond existing enterprise software.

“These are net new applications that can be built to rethink how certain processes and functions have operated,” he says.

Many of those applications are only just emerging. He singles out AI-powered drug discovery for pharmaceutical companies as one of many ripe areas for longer-term growth.

Ms. Porter highlights still more areas for investment as the effect of AI spreads. Data communications and edge computing will be clear growth areas as companies push AI algorithms closer to the applications where they will be used, such as mobile devices and autonomous vehicles.

She adds that companies innovating in power generation and conservation will also be of interest as big tech works to drive down the immense energy consumption of AI algorithms.

Choosing from many opportunities

With AI spawning so many opportunities, how can investors focus the lens?

“We’re long-term investors, always focused on growth at a rational price,” Ms. Porter says, advocating active asset management.

“We ask what incremental growth will these companies have in terms of sales and profitability?”

Alternatively, passive ETFs offer a way to cover a sprawling and rapidly evolving market, says Naseem Husain, senior vice-president and ETF strategist at Horizons ETFs Management (Canada) Inc. in Toronto.

Horizons Robotics and Automation Index ETF RBOT-T, like Global X’s Robotics & Artificial Intelligence ETF, follows Indxx Global Robotics & Artificial Intelligence Thematic Index – a basket of shares in companies involved in developing robotics and AI.

“It’s wonderful to have a product that can go out there and buy 50 to 100 names, look at it quarterly or annually, rebalancing as the names change and come into size and liquidity thresholds, and do that due diligence on behalf of the investor,” he says.

Horizons Robotics and Automation Index ETF, which features Nvidia as its largest holding, jumped 27.5 per cent between the launch of ChatGPT 3.5 in November and May 31. However, it has delivered a more modest 9 per cent growth to that date since inception. It’s an indicator of just how volatile the AI market has become.

Investors must be prepared to balance their investments, understanding that they’re at the beginning of a long cycle, Mr. Husain says. He believes that innovations will come thick and fast to drive a long-term upward trend in a volatile market.

“In this AI space, we’re just watching the players take the field,” he concludes. “We’re so early in the game, we don’t even know if it’s baseball or football.”

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