We keep hearing about the artificial intelligence (AI) boom or so-called fourth industrial revolution. Undoubtedly, anytime there’s such a game-changing, disruptive technology, there’s bound to be the potential for profit. At the same time, displacement is also a big concern that next-generation generative and predictive AIs could bring forth.
Of course, even the hottest technological boom of a generation can lose you big money. You see, betting on a trend just isn’t enough to punch your ticket to years of market-beating returns. Indeed, if there’s economic profit to be had from a nascent or emerging industry, you can be sure there will be a great deal of competition. Right now, there’s an arms race for AI-capable chips.
Next up, firms will be looking for ways to differentiate themselves and turn AI prowess into actual cash flows. At the end of the day, simple growth stories and promises are not enough. You can’t really pay bills with promises of growth way into the future! And in a higher interest rate environment (the 10-year U.S. note recently hit 5%, and it could go even higher from here), investors should be pickier about which technology companies they choose to stash in their portfolios for the long haul.
Value also matters in growth and AI investing, folks!
Even if you do manage to pick a winner from a tech-driven revolution, you may not profit a great deal if you overpaid for shares of the said company. Valuation matters, especially in the pricier realm of high-tech growth stocks. That’s why it’s vital to insist you receive some sort of margin of safety. It can be tougher to tell what’s truly cheap in the world of growth.
Still, one must consider all aspects of a business so they can gauge the valuation. Whether you form a discounted cash flow (DCA) model or compare a stock’s valuation multiples (think the price-to-sales or price-to-earnings multiple) to its peers in the industry, you should only hit that buy button if you can ensure you’re not running the risk of overpaying and playing the dreaded game of greater fools (based on the greater fool theory, which has nothing to do with us Fools here at The Motley Fool).
Indeed, greater fools buy a stock with the belief someone else will pay a higher price, with little to no regard for the valuation. On the other hand, Fools (note the uppercase, folks!) are all about sound, long-term investing. And getting the most from every investment dollar.
Back to the AI boom and potential investments to ride the trend. If AI has kicked off the fourth industrial revolution, I think Canadian investors should be stashing names on their watchlists and getting skin in the game on the stocks they truly believe in. Kinaxis (TSX: KXS) is a supply-chain management software developer that has plenty of skin in the AI game. It’s a TSX-traded play, but Canadians may wish to venture south of the border if they want to really amp-up their AI exposure.
Alphabet: A top AI bet for Canadian investors, too!
Alphabet (NASDAQ: GOOG) is just one AI-driven tech titan that I believe isn’t all too expensive, given the potential for AI to take its growth prospects to the next level. Indeed, it’s a magnificent company that I think could be one of the winners in the rise of AI.
Whether it will triumph over its hungry AI rivals remains the big question. I’d argue Alphabet doesn’t have to best its peers in every product category it operates in. If the firm can maintain the width of its moat in search, I do think Alphabet will be an AI disruptor rather than a firm disrupted by the rise of AI.
Either way, Alphabet stock looks cheap, given the cutting-edge AI tech you’re getting. The stock trades at 29.2 times trailing price-to-earnings and has done a great job of shrugging off recent market-wide volatility. My takeaway? Canadians should keep watch of GOOG shares if they’re serious about getting a ticket to the rise of AI.
