Investing in artificial intelligence companies
In investment terms, the concept of artificial intelligence (AI) stretches beyond laboratories of scientists trying to develop neural networks. It now includes machine learning (a field of computer science where computers learn without being programmed), deep data (looking for specific information to help predict trends or make calculations), natural language and autonomous vehicles. It also includes any company that could feasibly benefit from these technological advances. These areas are presented hand in hand with industrial automation and smart robotics to present a holistic investment universe.
How does the world of investment view artificial intelligence?
Investment providers have developed several ways to access this theme. Over the last few years,[OJ1] there have been a number of actively managed funds launched which incorporate some degree of AI as a theme, while there are also exchange traded funds (ETFs) which offer exposure to the specific areas of automation and robotics.
- The London-listed Robo Global Robotics and Automation UCITS ETF share issuance has risen from just 4.4 million shares in May 2016 to a peak of 81 million at the beginning of 2018
- iShares Automation & Robotics was launched in September 2016, but reached a market capitalisation of £2.75bn at the end of 2020.
Should we be seeking to invest in artificial intelligence companies?
At first glance, the economics of the AI and robotics industry appear compelling. According to a prominent AI fund manager, “we are at the start of the adoption of AI. Those positioned to benefit will enjoy a sustained period of growth.” Even more eye catchingly from an economic perspective, “AI has the potential to double economic growth rates over the next 20 years.”
The corporate world seems to agree.
Do statistics support investing in artificial intelligence companies?
When we reviewed the industry in March 2018 we found the following:
- CB Insights, which offers “machine learning, algorithms and data visualisation to help replace the 3 Gs (Google searches, gut instinct and guys with MBAs)” to predict future trends, estimates that US$1.5bn has been invested in AI companies in the last five years.
- Many of the largest companies in the world are investing in AI and machine learning, including Apple, Google, Amazon, IBM, Intel, Microsoft, Nvidia, Qualcomm and Tesla.
- Research and Markets, an organisation with 1,700 research teams in 81 countries, expects the global AI market to reach US$36bn of revenue by 2025, growing at a compound annual growth rate of 57% between 2017 to 2025.
- McKinsey estimates that 30% of tasks in 60% of occupations could be automated.
Robotics also appears to be a growth industry. The International Federation of Robotics in their World Robotics 2020 Industrial Robots report shows a record of 2.7 million industrial robots operating in factories around the world; an increase of 12% on the year before. Sales of new robots represented the 3rd highest sales volume ever recorded. Asia remains the strongest market and within five years, India has doubled the number of industrial robots operating in the country’s factories.
Unsurprisingly, the shares of many companies involved in automation have responded favourably Yaskawa, a prominent Japanese company involved in the robotic industry saw its share rise 228% in the five years ended 2020, massively outperforming the broader market.
This is not a recommendation to invest or disinvest in any of the companies, funds, themes or sectors mentioned. They are included for illustrative purposes only.
Investing in robotics/artificial intelligence stocks
At CGWM we prefer to avoid investing in fads and fashions. While AI and robotics may not prove to be a passing fad, they are certainly in fashion at present.
There is also a fallacy that faster growth automatically feeds through to higher investment returns. Unfortunately, there are flaws in this argument. For example, many of the growth statistics surrounding artificial intelligence investment focus on revenues, as profitability within much of the industry is a scarce commodity. This is reminiscent of the late 1990s tech boom, and at this stage it is impossible to know which areas of AI, and which companies, are likely to survive and thrive. If history is any guide, there will be as many failures as successes.
What does the future hold for investment in artificial intelligence?
We should beware of relying heavily on forecasts which look too far into the future, particularly from those who have a vested interest in the area. While economic growth may be boosted by the adoption of AI and deep-thinking algorithms, this is by no means certain. Just as today's world looks nothing like the one envisaged by sci-fi writers of the past, tomorrow's world may look vastly different from current predictions. The forecast ‘winners’ in certain scenarios may not be the existing incumbents; they may not even exist yet.
History also shows that the benefits of new technologies often take longer to materialise than first expected. For example, Paul David, the academic economist who has undertaken analysis of scientific progress and technological changes, found that when factories first started to use electricity, they became slightly more productive. It was only later, when the factories went further and began changing their configurations to capitalise on electricity, that the surge in productivity really began. Maybe humans will need to adapt their behaviour to deliver the true benefits of AI and automation.
Another issue is whether anyone considering the benefits of investing in artificial intelligence companies can truly allocate to or between the various AI sectors, or whether a wider technology exposure should prove sufficient. Would a broad technology fund, managed by experts in their field and who understand the fact and fiction of the AI investment universe, be a better investment route? The definitions of AI are so variable, and the artificial intelligence investment management universe so ‘non-standard’, that a compelling top-down view can quickly become blurred.
We always need to be sceptical of the claims made by the proponents of investment opportunities. The prospects offered by investment in AI, robotics and automation certainly seem compelling. However, we don't take such claims at face value, or assume that they automatically guarantee a successful investment outcome. Instead, we will weigh the pros and cons of the investment rationale and suggest that investors also tread carefully before committing to this area.
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Found this interesting? Further reading:
- Read the full factor investing white paper here
- Politics and investing - a primer for investors
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- The consequences of low interest rates on investors
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Investment involves risk and you may not get back what you invest. It’s not suitable for everyone.
Investment involves risk and is not suitable for everyone.