The top AI stocks will profitably bring the new technology into the world. But the benefits will mostly accrue to well-established businesses, not start-ups

Some of today’s Artificial intelligence (AI) start-ups may evolve into profitable companies. But the biggest winners will be those companies now in the middle of the risk spectrum and that use AI to find better ways to serve their human customers.

They outperform comparable stocks for years “We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Top AI stocks merge big computing with big data for enhanced products

For example, autonomous vehicles take full advantage of artificial intelligence, which is essentially the merging of today’s big computing with big data.

Computers with artificial intelligence (AI) can improve over time using different algorithms (a set of rules or processes), as they are fed more data. They learn by recognizing trends in data that let them make decisions. For example, designing autonomous vehicles involves building machines that learn to navigate traffic. Such a system may use pattern-recognition algorithms from which it learns, for instance, to identify pedestrians and animals. This means that it knows to brake when it sees a zebra, even if it has never encountered a zebra before.

Meanwhile, though, we think that the best way to invest in AI is through companies that already have a sound base of profitable business—business that is enhanced by the use of AI.

One such company is Alphabet Inc., which is the holding company for Google’s Internet search business and its smaller, riskier operations. The company calls those smaller businesses its “Other Bets”; which includes self-driving car technology, among other tech products.

Alphabet’s self-driving car technology business operates under the name Waymo and is one of the Other Bets under development. If Waymo begins to generate revenue, and earn a profit, Alphabet may eventually decide to set up the business as a separate firm and through a spinoff hand out shares to its investors as a special dividend.

Investors need to exercise caution when looking for top AI stocks

The highest form of AI, known as “deep learning,” involves inundating a powerful computer system with labelled information, and waiting for it to make connections, and categorize and sort data. In theory, it can then put new data in context using that information. Such a model is designed to replicate, to a lesser extent, the connectivity of the human brain.

Machines have already beaten the finest (human) players of poker and Go—achievements that experts had predicted would take at least another decade. Google’s DeepMind team has used AI systems to improve the cooling efficiency at data centres by more than 15%, even after they were optimized by human experts.

AI is being used by cybersecurity companies to detect viruses and malware, and by PayPal to prevent money laundering.

Investors considering artificial intelligence stocks visualize AI-equipped machines that will be able to, for example, carry on intelligent conversations without revealing they are less than human. No doubt AI will have greater impact on our lives as time passes. But we think investors need to exercise caution when looking for AI stocks to buy.

It will likely take a while for true AI to fully emerge—and that goes for the top AI stocks as well

I once had a conversation with a middle-aged family doctor/real-estate investor. During this conversation, he said, with complete confidence, “I’m cutting back on my medical career and moving into real-estate development. Long before I want to retire, I expect my job to disappear due to competition from AI (artificial intelligence).”

This is an example of doom and gloom thinking, but the ultimate example came on the first day of this century, with the non-arrival of the so-called “millennial bug,” or Y2K for short.

In the late 1990s, computer consultants warned that at the stroke of midnight on December 31, 1999, computers around the world would freeze up because of a problem with their data-storage limits. Computers used to use just two digits to designate a year. So they wouldn’t be able to tell what came after 1999; ‘00’ could mean 1900 or 2000. The problem had a simple fix, however. By the last day of 1999, most computer owners had attended to it, and damage from the predicted crisis was negligible.

The shift from human to AI doctors will occur at a slow pace. AI will replace family doctors sometime after it replaces the voice and chat help lines that people use when they have a problem with a computer, a cell phone or a utility bill.

People have a long record of guessing wrong about the impact of new technology, and on how long it will take for the new technology to become part of daily life. You’ll guess right much more often if you just assume that technological progress eventually leads to economic progress. You just need to keep in mind that false starts are common.

Use our Successful Investor approach when investing in stocks—including the top AI stocks

• Invest mainly in well-established, mostly dividend-paying companies;
• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
• Avoid or downplay stocks in the broker/media limelight.

What industry do you think will become most profitable because of artificial intelligence?

What benefits to investors do you see coming from AI stocks in the near future?