“Artificial intelligence” (AI) has emerged as one of the hottest topics around.
Companies are announcing. Investors are buying. And stocks are soaring.
AI is an amazing technology. I’m excited about it too. I’ve been studying it, machine learning, database architecture, and algorithm construction for some time now, and I’m incorporating more of it into my stock-picking system to bolster our already high success rate – and keep us ahead of the always-aggressive Wall Street.
I also believe AI has opened a hefty wealth window.
But here’s where you need to be shrewd. You want to buy reality … and beware of the hype. You want to think independently … and not follow the crowd.
Do that and you’ll cash in on AI’s promise.
And today I’m going to show you one way to do just that …
Manias are part and parcel of the stock market – always have been and always will be. Stocks in 1929, dot-com plays in 1999 and 2000, housing in the middle 2000s, COVID stocks in 2020.
And AI stocks today.
This round of AI mania was ignited back in November with the release of ChatGPT, which stands for Chat Generative Pre-trained Transformer. (I wonder if the bot named itself.)
ChatGPT’s main purpose is to think, write, and talk like a real person. But it does more than that – a lot more. It can write computer programs, compose music, write essays, play games, and more. Students are using it for schoolwork, and even some scientific papers already list ChatGPT as one of the authors.
Like any paradigm-shifting invention, these “changes” have triggered debate: The mania has raised all sorts of ethical questions; and folks are worrying that their jobs could be eliminated by this new “machine.”
But those questions aren’t slowing the AI stampede. ChatGPT hit one million users in just five days and is on track to hit 100 million users faster than TikTok and Instagram.
Every company and every investor seem to “want in” on the action.
Just this week, Alphabet (GOOGL) launched its own chatbot – one it calls Bard. And it’s already a big deal. Bard is being integrated into Google Search, which is already Alphabet’s biggest source of revenue by far.
Alphabet’s announcement came Monday. Microsoft (MSFT) announced an event for the very next day. Microsoft is already an AI player: It’s a big investor in OpenAI, the company that developed ChatGPT; it provides the cloud-computing power to run ChatGPT; and it uses ChatGPT.
And it isn’t stopping there.
In that Tuesday announcement, Microsoft said an updated version of the Bing search engine will include a juiced-up version of ChatGPT. Want to plan your vacation? Just ask Bing and ChatGPT to do it for you. (I’ll pass, thank you.)
Outside the U.S. market, China tech giants Baidu (BIDU), JD.com (JD), and Alibaba (BABA) joined the frenzy with announcements that they, too, are working on AI chatbots. On Tuesday, following its disclosure, Baidu shares soared 12% in a single trading session.
So we’ve looked at the giants.
Let’s now take a peek at the challengers.
The (High) Flyers
By challengers, I’m talking about the small AI startups whose shares are zooming as investors hope for lottery-ticket windfalls.
Let me be candid: It’s always possible one of these could be a winning lottery ticket; but the odds are strong that the bulk of these won’t hit. And if you buy near the peak – like a lot of folks did with the dot-com bust – the “hit” you actually take will be in the loss column.
One company getting a lot of attention is C3.ai (AI), which also gets bonus “style points” for having AI as its ticker. C3.ai makes AI software for companies. To show you how crazy things have gotten, C3.ai traded 1.5 million shares on the first day of 2023. On Monday, volume hit a staggering 104 million – nearly 70 times more shares.
C3.ai’s shares have surged 135% in the first six weeks of 2023. A similar company, BigBear.ai (BBAI), has jumped almost six-fold over the last month.
And SoundHound AI (SOUN) has more than tripled in that same time.
Sounds juicy, doesn’t it?
But … look back over the past 12 months and you see C3.ai has gained 38%, while BBAI and SOUN are down almost 50%.
The “Smart” Way to Play AI
The truth is it’s way too early to know how many – if any – of those three stocks will be big winners.
It’s possible, yes.
But it’s not necessarily probable.
Just like with a lottery ticket.
My whole proprietary stock-rating system is based on probability – the ability to predict with high degrees of certainty which stocks will be winners … and which ones you should avoid.
There’s not enough “history” with these early-stage companies to calculate real odds – to make a success-or-failure prediction. I suppose we could offer one based on the hype, but you and I both know how risky that can be. Stocks that are white hot today can just as easily be abandoned tomorrow.
They can turn into the investor equivalent of a ghost town.
After decades of research and back testing massive data sets, I know the stocks most likely to make you money are those of healthy-and-growing companies (strong fundamentals) in an uptrend (strong technicals) that are also being bought by Big Money players.
Every day at 2 a.m. my computers start retrieving the latest data so my algorithms can start their number crunching – and generate Quantum Scores for more than 6,000 stocks.
And that includes Quantum Scores for the AI startups we’ve just spotlighted.
Let’s take a look … and I’ll share the story these numbers are telling me:
C3.ai Quantum Score: 65.5. Not bad on its face – but the analysis that I provide shows us that there’s a cause for some caution here. The Quantum Score “sweet spot” is typically in the 80s. AI is clearly the best of the three tiny ventures here. But the Quantum Score is made up of two other metrics – one based on fundamentals (the company’s finances) and the other on technicals (the strength of the stock). And a low Fundamental Score of 45.8 (thanks to poor earnings growth, low profit margins, and other factors) gives me real pause. C3 is not yet a profitable company.
BigBear.ai Quantum Score: 46.6. This stock has popped the most lately, but it was literally a penny stock (trading under $1) until a month ago. Its Fundamental Score is a paltry 12.5. BigBear is still losing money, and its four quarterly reports as a public company have disappointed Wall Street.
SoundHound AI Quantum Score: 39.7. BBAI has been public less than a year, so we don’t even have four quarterly reports of data yet. SOUN nearly doubled to $15 after it debuted last April, but it quickly lost two-thirds of its value and has remained under $5 since last summer.
These may be the red-hot AI stocks right now, but that also means investors have a higher chance of getting burned.
Bigger isn’t always better, but at this early stage of AI’s emergence, companies with the deepest pockets are the ones that can develop the technology and incorporate it into their products quickly.
Companies like Microsoft (MSFT). I am not recommending it in my Quantum Edge Pro service. But I like the company for the long haul – a lot. And if you want to invest in AI, this stock would top my list right now.
Microsoft is just a really well-run company. It sports a strong Quantum Score of 73.5. It rates equally well in both Fundamentals (75) and Technicals (73.5), which is great balance. And for the icing on the cake, you can see several rounds of unusually heavy buying over the last three months (the green bars below).
AI is an amazing technology. It’s finding its way into more and more products and becoming a bigger part of our daily lives. I am incorporating it into my existing quantum system to boost my data-analysis capabilities and improve even more our ability to identify the best opportunities in the market.
You can’t do that based on one corporate announcement or the latest hype. You need data, and some of the newer AI stocks out there just don’t have it yet.
That makes them “bets,” not investments.
Be careful if you go that route. You might get lucky and catch a rally. But you could also end up with a big hole in your pocket.
And that’s the problem. There’s no way to really know.
Stick to the companies with superior fundamentals, strong technicals, and Big Money buying, and you should do just fine.
I’m living proof. And yes, I’m a real person.
Editor, Jason Bodner’s Power Trends