Is Now A Good Time to Invest in AI? Which Entry Points Should We Consider?

Don’t Chase the Top, Look for Smart Plays!

Investing in AI (Artificial Intelligence) can be a promising opportunity, but whether now is a good time depends on various factors, including your investment strategy, risk tolerance, and the broader economic and market conditions.

NVIDIA Stock Price

When it comes to investing in AI, it’s important to avoid the temptation of chasing stocks that have already skyrocketed.  Some AI-related stocks have seen significant price increases, leading to concerns about overvaluation. While growth prospects are strong, stocks with inflated valuations might carry more downside risk in the short term if the market corrects. Take NVIDIA for example. While it’s a fantastic company with a strong foothold in AI, buying when everyone else is often means you’re buying at the top. The stock has experienced a 30% pullback this month.

When everyone is buying a stock like that, quite often you should consider selling the position.   If the company remains a core piece of the strategy, you might consider trimming partial positions from that one trade.

Why?

This helps convert "paper profits" into actual realized profits. It also prevents over concentration as trimming the position helps rebalance the portfolio, ensuring that you’re not overly reliant on a single stock, sector, or asset class.

Is the AI Space putting in a top?

The question of whether the AI space is "putting in a top" (reaching a peak before a decline) is a valid concern, especially given the significant run-up in AI-related stocks and the general excitement around the industry.  AI-related stocks, particularly companies like NVIDIA, Microsoft, and other AI chipmakers and software providers, have seen significant gains throughout 2023 and 2024. This has led to high valuations, with some investors concerned that prices have been bid up too far, too fast.

This does not mean we should avoid investing in AI altogether. Instead, we should look for attractive opportunities within and related to the AI sector. For long-term investors: AI still presents a compelling growth opportunity, especially for those with a horizon of 5 years or more. However, given the high valuations in the market right now, dollar-cost averaging or gradually building a position may help manage the risk of entering at potentially overinflated prices.

AI's Long-Term Growth Potential

Even if the AI sector experiences a short-term correction (or top) the long-term growth potential for AI is enormous. AI adoption is expected to grow across industries, including healthcare, finance, manufacturing, and autonomous systems. Many analysts believe that AI is in the early stages of a multi-decade growth cycle.

Here are some key areas to consider:

• Companies with Proprietary Data: Data is the lifeblood of AI. Companies that own vast amounts of proprietary data have a significant advantage as this data can be used to train AI models, making these companies invaluable in the AI ecosystem.

• Hardware Companies with an Edge: Look for hardware companies that have a competitive edge in chip supply. Their long-standing relationships with NVIDIA, Intel, TSMC, and others can lead to innovations and supply chain advantages that make them lucrative investments.

• Hyperscalers:  Companies that provide cloud computing infrastructure and services on a massive scale, offering cloud platforms capable of scaling up or down rapidly based on demand. These platforms support enormous amounts of data and computing power, allowing businesses to leverage cloud services like storage, computing, and networking without needing to build their own infrastructure.

• Data Management Firms: Companies like Palantir and Salesforce are crucial in the AI landscape. They specialize in managing and analyzing large datasets, providing the infrastructure needed for AI applications.

• Utility Companies: AI requires substantial computational power, which in turn demands significant energy resources. Investing in utilities, such as water and energy companies, can be a smart play as they support the infrastructure needed for AI growth.

Long-term Perspective: While there might be short-term volatility, AI's structural growth story remains compelling over the long term. Investors with a longer horizon may still see strong growth opportunities in AI, but it might make sense to be cautious about entry points, valuations, and portfolio concentration. 

Talk to your fiduciary advisor about their thoughts on this play. They will consider where you’re at in your own investing journey and which AI entry points make the most sense for your own portfolio and long-term objectives. If you don’t have an investment advisor, feel free to reach out to me via email for a consultation!

By focusing on these strategic entry points, you can position yourself to benefit from the ongoing advancements in AI without falling into the trap of chasing overvalued stocks.