Artificial intelligence (AI) has fueled impressive gains for many investors in 2023. But as we get ready to usher in a new year, some analysts and investors wonder if artificial intelligence is a bubble. One reason for their concern is the number of companies that mentioned AI during the second quarter earnings season. In the second quarter, there was a 365% quarterly increase in the number of companies that referenced AI in their earnings report.
It seems that any company that had an AI-related offering, no matter how loosely defined, was making sure that Wall Street and Main Street knew about it. The tactic worked. Research from WallStreetZen showed a positive correlation between references to AI and a company's stock price. 67% of the companies that mentioned AI in their earnings report saw a gain in stock price. The average gain was 8.5%.
Looking for substance over style
However, it became evident that, for some of these companies, any connection to AI was more style than substance. So, heading into the third quarter earnings season, many analysts made it clear that a company would have to explain how, specifically, it was going to be able to monetize AI.
Yet even with a higher bar to reach, many companies appear to be doing just that. WallStreetZen reported that the number of AI mentions in corporate earnings reports increased by 13% in the third quarter, and 58% of the mentions were positive, effectively unchanged from the prior quarter.
But not all the news was positive. Although the number of mentions increased, the impact on a company's stock price seemed to be affected. Only 55% of technology companies saw an increase in their stock prices, down from 71%. And for non-tech companies, only 51% of companies managed a stock price increase, a decline of 14%.
While this information may be interesting information to throw out at your next gathering with friends, what you really want to know is what stocks benefit from these references and which are not convincing investors?
Big tech is the biggest winner
It won't surprise you to see that the stocks posting the biggest gains were those of some of the biggest technology companies. In the second quarter, 71% of tech companies that mentioned AI saw their stock prices go up by an average of 11.9%.
The two biggest winners were Adobe Inc. NASDAQ: ADBE, which posted a 38.2% share price increase, and Meta Platforms Inc. NASDAQ: META, which posted a gain of 37.6%. An honorable mention went to Match Group Inc. NASDAQ: MTCH.
Conspicuously absent on that list is Nvidia Corporation NASDAQ: NVDA, which came in ninth place. However, in the most recent quarter, technology stocks once again led the way and this time, Meta Platforms and Nvidia were the biggest winners.
Not every tech stock was a winner
In the third quarter, Analog Devices Inc. NASDAQ: ADI and Alphabet Inc. (NASDAQ: GOOGL) were the two stocks that saw their stock price fall the most despite mentioning AI. The companies saw a decline in share price of 17.2% and 11.4%, respectively.
Non-tech stocks have a much bigger burden of proof
With a few notable exceptions like Carrier Global Corporation NYSE: CARR and Expedia Group Inc. NASDAQ: EXPE, stocks of non-tech companies haven't benefited as much from mentioning AI in their earnings reports. However, this broad category includes several sectors, including financial stocks, consumer discretionary stocks, consumer staples stocks, and information technology stocks. Many of these sectors have been underperforming the broader market regardless of an AI connection.
How to view AI as part of your investment strategy
Artificial intelligence is not a trend or passing fad. However, analysts are correct in believing that the burden of proof is now firmly on companies to answer the "So what?" question when it comes to AI. Simply having an AI offering is not going to be enough. Companies will have to show investors that customers are willing to pay for their AI capabilities – and, ideally, pay a premium for them.
It's fair to say that 2024 may not see the explosive growth that was evident in 2023. But there's still room for the stock of many companies to move much higher.
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