When ChatGPT launched a year ago, it was more than the latest cool new online tool. It changed the conversation around artificial intelligence, or AI, and sparked an uproar among investors looking for the stocks that would benefit most from the widespread adoption of such tools.
Some observers believe that ChatGPT – which was released to the public on November 30, 2022 by its developers at OpenAI – may be as transformative as the introduction of the Internet, but focused on a single product, similar to how the iPhone does not just dominate the market for mobile devices has changed phones, but also countless applications, business models and everyday life.
Semiconductor chip designer Nvidia (NVDA) was the poster child of the AI boom. The company’s stock has risen over 200% in the past 12 months, driven by its dominance in the market for the chips best suited to data centers that enable AI.
More broadly, the Morningstar Global Next Generation Artificial Intelligence Index has gained about 68% in 2023, more than triple the broader market’s rally.
Salesforce stock price
What is ChatGPT? Why does it matter?
ChatGPT didn’t come out of nowhere. The underlying technology falls under the broad umbrella of AI, a concept that has been around for decades. The tool is a so-called generative AI, which means it learns to respond to input prompts and generate texts or images. Generative AI opens the door to significant efficiencies across a variety of industries and society as a whole. There are also concerns about misuse.
The landscape of artificial intelligence
“This market exploded in 2023 with increasing investment in generative AI, and we don’t see it slowing down any time soon,” said Brian Colello, Morningstar’s director of technology.
AI is still in its infancy as a business tool, and there is an entire food chain beyond semiconductor companies like Nvidia and Taiwan Semiconductor Manufacturing (TSM) that will also benefit from its expansion in the coming years. These include chip supplier Applied Materials (AMAT) and data center infrastructure companies such as Arista Networks (ANET).
A large number of companies are starting to integrate AI into their products. Salesforce (CRM) has been using AI since 2016. Microsoft (MSFT) is now integrating its chatbot Copilot into its widely used Microsoft 365 software. Colello notes that some, like Wendy’s (WEN) and Walmart (WMT), are using AI directly with retail customers.
To help investors navigate the AI space, Morningstar analysts have broken it down into four broad themes: generative AI, AI data and infrastructure, AI software, and AI services.
AI investment themes and stocks
Big ideas often precede the ability of technology to make them successful and widely accessible. To perform tasks that mimic human intelligence, computers need extremely powerful, fast, and flexible semiconductor chips—sometimes called accelerators—as well as access to enormous amounts of information from which they can “learn.” The Internet has created a pool of vast amounts of information for models to search through. Meanwhile, there have been significant advances in chip technology over the past few decades, particularly Nvidia’s graphics processing chips, which first became widely used in video games.
“Cloud computing companies need to invest in accelerators, and the chip supply chain is investing in capacity and technology to drive massive growth,” says Colello. The boom in AI stocks came after Nvidia reported a surge in AI-related chip demand in May that crushed Wall Street expectations.
“An old saying goes that the best way to profit from the gold rush in the western United States in the mid-19th century would have been to sell picks and shovels to miners rather than betting on the miners themselves,” says Colello.
“OpenAI may have been the first major language model company to ‘strike gold’ in the AI gold rush, but others are likely to win and still others will fail. Meanwhile, Nvidia has reached a trillion-dollar valuation and has benefited the most from investing early in generative AI and becoming the dominant “pick and shovel” maker.”
Nvidia’s data center revenue will explode
Colello continues: “Nvidia’s expansion into software and networking equipment is like a shovelmaker trying to expand into boots and blue jeans.”
While the true impact of AI on the economy and the world at large will not be realized for many years, the biggest early winners are the companies that build the semiconductors required for the massive amounts of computation needed to train AI models and are required to process queries.
AI accelerator sales are poised for massive growth
Accelerator Revenue Estimates.
The next big players could be cloud computing companies. The emergence of generative AI has further fueled the rise of cloud computing, already one of the biggest current trends in technology investment. It is now common for companies to rent computing capacity from industry leaders such as Amazon.com (AMZN) through Amazon Web Services, Microsoft through its Azure platform, Alphabet’s (GOOGL) Google Cloud and Oracle’s (ORCL) Cloud.
Now it looks like cloud computing will go a significant step further to store the immense amounts of data needed to train and manage AI models and answer end-user queries.
Generative AI will be key to the growth of cloud computing
Estimated revenue of the cloud computing industry.
All of this data needs to be managed. At this level, others are likely to benefit from AI, such as data lake companies Snowflake (SNOW) and MongoDB (MDB).
“We believe the datasphere – all the data that exists in the world – will explode due to the metadata created by AI like ChatGPT, as well as the new data points that need to be collected to be incorporated into AI models,” says Morningstar -Analyst Julie Bhusal Sharma.
“This is passive proof of why companies like Snowflake and MongoDB still have a lot of growth ahead of them, not to mention their superior technical standing.”
The exploding market for database management software
Forecast DBMS market
Here’s a look at some of the top AI stocks to watch across the tech sector, along with highlights from their Morningstar metrics.