AI: What investors need to know right now

With so much money pouring into AI stocks, it’s fair to wonder whether we’re in an AI bubble and if so, what that means for people’s investments.

Here’s the simple truth. AI is a long-term opportunity, just like most breakthrough technologies. But in the early stages, it’s incredibly hard to know which companies will come out on top or how the technology will evolve. Right now, investment is being poured in upfront with the hope that the payoff comes later. In the short term, expectations are running faster than the reality, which means there’s a fair bit of faith being priced in. And faith is not the strongest foundation for confident investing.

The big boom theory
AI moved from futuristic to mainstream when tools like ChatGPT launched in late 2022. That breakthrough triggered a global race among the world’s biggest companies to build faster, smarter models supported by enormous spending on chips and data centres.

But there’s an imbalance worth noting. While AI related spending could reach $600b this year, revenues from AI companies like OpenAI are still only a fraction of that – and that gap is one of the reasons people are questioning whether a bubble is forming.

Are we in bubble territory?
AI related shares have risen far faster than the broader market since 2023. Recent pullbacks show how sensitive this part of the market is when expectations are high. These swings don’t prove we’re in a bubble, but they do remind us that rapid growth usually comes with rapid volatility.

A useful comparison is the dotcom era, which ended in one of the biggest tech crashes in history. Some valuation measures today aren’t far off those levels, and that’s a reminder not to ignore risk. But there’s an important difference this time. The major technology companies driving AI today are profitable, diversified, and funding their AI investment from their own cash flows. That’s a very different backdrop to the speculative, cash-burning firms that collapsed in 2000.

How Milford looks at AI
We group the AI investment universe into three key areas.

1. Companies that build the core hardware such as chip designers and manufacturers. They’re early winners, but also some of the most exposed if spending slows.
2. Large cloud platforms such as Microsoft, Amazon, and Alphabet. They benefit today and have potential long-term upside as AI tools become more widely adopted.
3. Businesses using AI to lift productivity in areas like software development, customer service, and operations. Their gains are likely to build more gradually, but it could be where we see some of the biggest winners over time.

Diversifying across these areas means you’re not relying on one part of the AI world to succeed. If one area slows down, the others can help balance it out.

What this means for everyday investors
We’re not the ones spending hundreds of billions on AI infrastructure, but we do benefit from the technology. AI tools are helping many Kiwi businesses and workers become more productive at relatively low cost.

At the same time, if you invest through KiwiSaver or managed funds, you probably already own a small slice of some or all of the big global companies building or using AI. That’s good news, because you get exposure to the long-term opportunity without having to guess which AI company will win – the experts do that for you. And if AI hits a rough patch, you’re somewhat protected because your investments are generally spread across lots of different sectors, not just tech.

The key takeaway
It’s important to remember that investing is a long game and involves at least some level of risk. But if you stay diversified with your investments, stay realistic, and avoid trying to pick a single AI winner, your returns should balance out over time. Focus on the quality and earnings power of the underlying businesses, rather than the headlines.

If you want to understand how long-term themes like AI fit within a diversified investment approach, get in touch with us. Or you can visit The Investing Place for more insights from the Milford investment team.