How investors can ride the rise of AI

Advancements in artificial intelligence are creating a host of investment opportunities.

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Key takeaways

  • Rising adoption of and advances in artificial intelligence (AI) may be one of the most important trends for tech investors.
  • Some of the winners may include the largest players in cloud computing, internet search, and social media.
  • AI is also creating investment opportunities beyond the bounds of the tech sector, such as in pharmaceuticals and biotechnology.

In the tech sector, looking for winning investments so often comes down to looking for the next big thing—the technological innovation that's poised to change our habits and disrupt existing industries in ways we'd never previously dreamed possible. For investors looking to 2022 and beyond, that may be AI.

Think of AI-powered devices as super-smart computers that can make human-like decisions much faster than any human brain. While you might not notice major impacts of AI on your day-to-day routines, its increasing adoption could create ripple effects throughout the tech sector—from semiconductors to software, internet, hardware, and services. Savvy investors could find opportunities riding those ripple effects.

From AI to ad dollars

Leading search engine providers and social media companies are working to convert AI advancements into growing ad revenue. There have been major strides made recently in natural language understanding, meaning the ability of machines to make sense of the casual, often-imperfect ways human beings use language in real life. The largest companies may be best positioned, since they have the necessary budgets to invest in engineering and computing resources.

For search engines, AI advancements can improve the rankings of pages served up to users, and boost revenue from the advertisers that pay to show up on those search pages. Meanwhile, top social media companies are increasingly using AI to decide what content (such as which posts and photos) to display when and to whom, and to improve their ability to target ads to the right users.

These improvements could help drive revenue and earnings growth at these companies over the next 12 months.

Moving to the cloud

AI requires major computing muscle, and that demand could benefit cloud computing providers, which can quickly scale capacity to meet increasing needs. The world is generating increasing amounts of data for AI to analyze, and more and more businesses are shifting from internal infrastructure to the cloud in order to store and process this data.

Again, the largest companies may be best positioned. Building a cloud ecosystem takes significant investments in servers, software, and other infrastructure, which creates a barrier to new entrants and affords competitive advantages to established players.

Health care and more

Advancements in AI are also creating investment opportunities in industries that lie beyond the strictly defined tech sector, such as pharmaceuticals and biotechnology. One of the most intriguing newer applications is the field of computational immunology—essentially, the practice of converting immune-system questions into mathematical questions that can potentially be solved by computers. AI-powered models can now drastically cut down vaccine-development timelines, by predicting how the human body's immune system will react to a new virus or pathogen. (Computational immunology claims credit for the astonishing speed with which the mRNA COVID vaccines came to market).

Finally, semiconductors continue to play a crucial role in providing the computing power required to develop these models. For this and other reasons, robust demand for products of semiconductor and semiconductor equipment companies is likely to continue in the year ahead.

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