Tiz Gambacorta, co-founder of Eunice.io. Former institutional fund manager. Founded a platform for smarter investing. Boutique fund manager.
Just two little letters are having a seismic impact on the stock market: AI.
And let’s be honest—there are more than a few investors who wish they had gained exposure to the likes of Nvidia earlier, long before it became the world’s most valuable company.
As governments ramp up AI action plans, companies invest aggressively in this technology and new innovations emerge with every passing day, there are opportunities for capitalizing on this megatrend.
And yes, AI does threaten to upend industries (paywall) just like the internet did a couple of decades ago: According to Bloomberg: “Historical precedents abound for new technology wiping out industries. The telegraph gave way to telephones, horsewhips and buggies were toppled by the automobile and Blockbuster’s eradication by Netflix exemplified the internet’s disruption.”
So, could AI trigger the next big extinction event? Analysts are warning that valuations are reaching “nosebleed levels,” and many news outlets are questioning whether the AI bubble is fit to burst. And, as recent events show, even the biggest names aren’t safe.
Nvidia suffered a stomach-churning $589 billion wipeout when DeepSeek burst onto the scene in January. It’s a textbook lesson in how the fortunes of even the biggest players can change in the blink of an eye.
Today’s tech giants are in danger of irrelevance if a scrappier upstart comes along.
Key Risks For Investors To Note
Stress-testing an investment prospect’s business model is a good place to start. Much of the regulation governing AI hasn’t even been written. A future clampdown could deliver a hammer blow to lucrative revenue streams.
Data breaches are another threat that the whole sector is grappling with, and exploits could prompt customers to take their business elsewhere.
While multimillion-dollar contracts with governments and major corporations can work wonders for a startup’s bottom line, risks can emerge without a diversified customer base. And given how the likes of Meta are racing to snap up top talent—sometimes with $100 million bonuses—the loss of key personnel could fatally affect a business’s ability to grow and innovate.
Building A Competitive Moat
A dizzying array of rival AI tools means a company’s competitive moat matters. Those with the most value—and resilience—will boast high-quality datasets, high-profile partnerships and high-visibility integrations with existing software already used by millions of people.
For example, pay close attention to a model’s error rate and whether accuracy levels are growing. Some of the most sophisticated systems self-improve too, meaning the gap with competitors will widen further over time.
AI businesses are currently raising capital like there’s no tomorrow, but investors should consider the potential consequences if the tap is suddenly turned off.
High inflation raises the risk of tighter monetary supplies in the future, making it much harder to borrow—or at the very least, much more expensive. Assessing financials can help ascertain whether a company will remain viable once the blank checks stop coming or can afford to stay on top of debt.
There’s no shortage of companies jumping on the AI bandwagon for hype, but the real gems lie in those deploying this technology to solve real-world problems. This is an industry that touches upon multiple sectors—including energy and cybersecurity—so compelling opportunities can be found in smaller stocks working behind the scenes to make this new age a reality.
A Market Shift Too Big To Ignore
Analysts at Bank of America compiled a basket of 26 companies (paywall) that could see demand dry up as their users flock to faster, cheaper and more powerful AI alternatives, with the likes of Adobe and Shutterstock taking a battering.
Even investors sitting on the sidelines of the AI boom need to sit up and take notice as the stock market evolves. The eight biggest constituents of the S&P 500—which collectively represent about a third of this index’s weighting—are all heavily involved in the artificial intelligence race. Should one of them sneeze as momentum starts to lag, the rest of the market could rapidly catch a cold.
AI’s upside is undoubtedly appealing to family offices, high-net-worth individuals and investment firms—and for good reasons. But those with long memories are tempering enthusiasm with prudence, remembering how the dot-com bubble led to unsustainable valuations and a painful crash.
This is an industry still very much in its infancy. Not all of the startups raising millions will survive, companies will fail, and the killer use case for AI may not have even been invented yet. Keeping a cool head in the current climate is a smart thing to do—and there’s nothing artificial about that.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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