Missed the early AI investing wave? There's still hope

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Investors who stayed out of artificial intelligence pure plays last year are likely finding it difficult to jump in now. Companies like Nvidia are trading at over 75 times earnings, making the industry highflyers seem both speculative and expensive.

Still, AI applications are making headway across a variety of industries.

Investors looking beyond the pure AI play can find opportunities in areas like industrial automation, healthcare, education and energy transmission, where the potential to leverage AI for productive purposes is very high.

And investors with an interest in sustainability can look for opportunities in second derivative plays where artificial intelligence is used to solve problems including decarbonization, physical resource constraints, and medical diseases.

Industrial automation and digital design

With labor shortages persisting in many developed countries and an ever-increasing need to make better use of physical resources, a major allure of artificial intelligence is its potential to increase productivity, either by replacing less efficient technologies (and/or labor) or via optimization of resources.

Investors with an interest in sustainability can screen for companies that are best positioned to leverage AI applications for purposeful uses, such as supporting decarbonization, optimizing physical resource use or improving safety in industries like energy and food production.

A couple of examples of companies with exciting AI applications are Schneider Electric and Rockwell Automation; both have announced new partnerships with Microsoft to leverage their OpenAI tools.

• Rockwell Automation (ROK) provides automation and software solutions to the manufacturing sector, primarily in the U.S. Like many parts of the U.S. manufacturing sector, the company struggled over the past year with an inventory bulge and supply chain constraints, which have been reflected in the company’s muted stock price performance. With the U.S. manufacturing sector showing signs of revival, companies like Rockwell offer an interesting entry point.
• Schneider Electric SE is an automation and energy management company, with about three-quarters of revenue generated from energy management and one-quarter from industrial automation. This makes the company particularly well-positioned to leverage AI advances for purposeful applications as well as to capitalize on the structural buildout of electricity grids.

Education

Artificial intelligence apps, such as ChatGPT, are increasingly part of an educational toolbox, just like calculators and simple web searches. Artificial intelligence employs adaptive learning, intelligent content curation, and smart monitoring and reporting to teach skills.

Dozens of learning apps powered by AI have sprung up in recent months.

One stand-out is Duolingo. The company’s main focus is on language learning, which is in high demand due to ever-increasing international worker flows and remote work. The company has recently added personalized language lessons fuelled by AI-powered feedback and as a result has reached all-time high engagement rates, as measured by the activity of daily and monthly users. Importantly, higher engagement rates are helping the company convert users into paying subscribers, and bolstering the company’s earnings: a powerful example of AI applications used for good.

Health care

Health care may be the sector that holds the most promise for positive disruption from AI. There are several research studies showing that AI can perform as well as or better than humans at some health-care tasks. And studies also show that patients often prefer responses to medical questions from chatbots over physicians, giving the chatbot higher ratings on both quality and empathy.

Note that a major challenge does still need to be overcome in using AI applications in healthcare: Currently, AI tends to amplify existing biases in health-care outcomes. Since AI-based health-care technology depends on the data that it is fed, a lack of representative data risks leading to biased models that ultimately produce incorrect health assessments, especially according to race.

Currently, the best medical use cases of AI applications involves settings where large data sets (especially images) that can be applied to well-defined problems are available. Diagnosing diseases, by reviewing X-rays for example, is a very effective use of AI. Companies like Quest Diagnostics, which offers access to diagnostic testing services for cancer, cardiovascular disease and neurological disorders, already leverage AI in their diagnostic tools, most notably for dementia.

Bottom Line

Investors who are uncomfortable jumping on the AI bandwagon at this stage can nonetheless find plenty of opportunities in second derivative plays. These companies are creating AI applications to solve important problems including decarbonization, physical resource constraints, and medical diseases.

Lenka Martinek is a Managing Partner at Sustainable Market Strategies and Nordis Capital, who has a background in portfolio construction and investment strategy. Montreal-based Sustainable Market Strategies, which performs market analysis about sustainable investing for investment managers, institutional investors and investment advisors, is a division of SMS Financial Technologies Inc., a privately held financial services and investment firm. The authors of this research note do not personally hold any position in the above-mentioned securities. Nordis Capital, a sister company to SMS that invests through an ESG (environmental, social and governance) lens, may hold positions in the above-mentioned securities. Click here to learn more about Sustainable Market Strategies.

This report should not be considered investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Redistribution of this report is prohibited without prior consent.

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