Catching the Next Wave of AI Companies

Artificial intelligence (AI) has been all the rage in equity markets since early 2023 for a good reason: AI’s potential to change the economy is quite real. But the best long-term investment opportunities might not lie with the tech giants currently leading the AI stampede.

Today’s Wall Street narrative hype goes like this: AI is an absolute game changer that will reshape the world and generate billions in profit. Six companies will lead the way to the promised land: NVIDIA, Apple, Alphabet (Google), Amazon, Meta and Microsoft. End of story. Buy these stocks.

These equities are expensive and priced as if the AI world belongs exclusively to them. But AMG believes there’s more to the story, and investors should be cautious about which stocks they buy. In the future, AI will most likely be a tool that greatly enhances productivity, so companies and industries that use AI most cost effectively will likely be the most valuable and probably be the biggest winners over time.

And they may be companies you’ve never heard of…yet.

Historically, capital-expenditure (CapEx) cycles, like the one pushing AI investment right now, tend to have similar characteristics. Whether it’s railroads, petroleum or the internet, investors threw vast amounts of capital into new technologies. Each investment boom brought meteoric rises in related stock prices as investors scrambled to cash in on expected profits. And up to a point, they got them—until supply exceeded demand—which tends to happen in these sorts of booms.

Take the telecom boom of the late 1990s, when companies raced to wire America with fiberoptic cables to enable high-speed communications connections that would monetize the internet. Capital spending boomed, but consumer demand didn’t. They had overbuilt—supply exceeded demand. High-flying tech and telecom stocks at the time were crushed. But this CapEx bust substantially reduced the cost of using the internet, which in turn allowed Amazon, Google and eventually Meta to truly monetize the internet.

Bottom line – The current AI CapEx boom may still have room to run, but investors should be cognizant that the dominant companies now may not be the dominant companies of the future. Savvy investors will keep their eyes open for U.S. small- and mid-cap stocks, as well as firms backed by venture capital, that make cost-effective use of AI technology. This second wave of AI companies might be the biggest winners of all.