AI Investments Surged in Value This Year; Question Arises: Is the Peak Already Reached in this Lucrative, Rapidly Expanding Sector for New Investors?
AI Investments Surged in Value This Year; Question Arises: Is the Peak Already Reached in this Lucrative, Rapidly Expanding Sector for New Investors?
What a stellar year it's been for stocks, kicking off in high spirits as the S&P 500 (^-GSPC 0.53%) verified the market's position in bull territory. The benchmark then went on a record-breaking spree, aiming for a 26% yearly boost. The Nasdaq (^-IXIC 0.83%) and the Dow Jones Industrial Average (^-DJI* 0.28%) followed suit, climbing by 32% and 16%, respectively. Notably, more than three-quarters of the 30 Dow Jones Industrial Average components are eyeing gains for this year, indicating numerous sectors contributed to this growth.
However, one specific sector has emerged as the 2024 standout, and that's artificial intelligence (AI). Companies specializing in AI development or leveraging it to enhance their operations have sparked the stock market surge. For instance, AI chip leader Nvidia (^-NVDA 2.20%) and AI-driven software company Palantir Technologies (^-PLTR 1.65%) have led the pack in both the Dow Jones and the S&P 500, respectively.
As we ponder passing the torch to 2025, you might be wondering if it's still worth jumping on this growth bandwagon - or if it's already too late. Let's delve in.
What makes AI so captivating?
Let's discuss the reasons why AI has captivated investors and has inspired tech giants like Meta Platforms (^-META* 0.67%) to invest heavily in the technology. Meta, in fact, identified AI as its leading investment area this year and plans to increase its allocation next year. Amazon's cloud service, AWS, also jumped in, providing AI-related products and services from chips to fully managed services. The company even employs AI to improve the efficiency of its e-commerce business.
AI offers companies the potential to decrease costs by making operations more efficient and the possibility of helping customers develop breakthrough products and services. These advantages could result in substantial revenue growth for AI-developing and utilizing companies, ultimately boosting stock performance over the long term.
Unsurprisingly, companies and investors view AI as a promising territory, as some investments have already yielded results. Amazon Web Services (AWS) recently achieved a $110 billion annualized revenue run rate due to its AI offerings, and Palantir reported its highest profits ever in the recent quarter thanks to the demand for its AI-drive software by customers.
Palantir and Nvidia
Naturally, leading AI innovators have driven market growth, and their valuations have skyrocketed. Real-world examples of this are Palantir and Nvidia, as shown in the chart below.
Moreover, the overall stock market has turned into a high-priced area, with the S&P 500 Shiller CAPE ratio, which measures the stock market's price-to-earnings ratio on an inflation-adjusted and 10-year average basis, touching one of its all-time highs.
These findings could lead you to infer that the most significant AI gains have peaked, and it's too late to join this industry. However, this isn't necessarily accurate. Although AI stocks have skyrocketed this year, this represents a long-term investment prospect rather than a short-term one.
Meta CEO Mark Zuckerberg also predicted a "multiyear investment cycle" prior to scaling Meta's AI products and services into profitable ones. Nvidia CEO Jensen Huang also highlighted the existence of $1 trillion worth of outdated computer systems that need to be updated for this new era of computing, suggesting a potential $1 trillion AI market by 2030.
All in all, this paints a picture of the early days of the AI boom, where the revenue growth for participating companies is just getting started.
This is wonderful news for investors, as it means there's still ample time for us to hop on the AI bandwagon. In fact, even the stocks that have exhibited remarkable growth potential might continue to surge in the long term, making this buzzing investing niche anything but a passing fad – instead crafting a significant component of your investment portfolio over the long haul.
Considering the impressive performance of AI-focused companies like Palantir and Nvidia, it's clear that investing in this sector could yield substantial returns in the long term. For instance, Meta Platforms, recognizing AI's potential, has identified it as their leading investment area and increased their allocation for it.
Furthermore, with experts predicting a multiyear investment cycle for AI products and services, and the existence of a massive $1 trillion market by 2030 due to outdated computer systems needing updates, investing in AI could prove to be a wise financial decision. In essence, the AI boom is in its infancy, offering a lucrative opportunity to integrate this sector into your investment portfolio for the long term.