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Investing in growth stocks is a high-risk business, especially where artificial intelligence (AI) is concerned. But the potential returns for investors who can get it right are huge.
At the moment, it seems as though every company on the stock market wants to be associated with the rise of AI. Investors, however, need to be able to separate the winners from the losers.
Background: not all that glitters is AI gold
For a lot of investors, one of the first names that comes to mind when it comes to AI is Adobe (NASDAQ:ADBE). And there’s a good reason for this – the firm has made a lot of its AI credentials.
Despite this, the stock hasn’t just underperformed the S&P 500 over the last five years – it’s actually down 32%. How is this possible given the company’s AI connections?
An explanation is not far to seek. Revenue growth has slowed substantially since 2020 and the stock now trades at a much lower price-to-earnings (P/E) ratio as a result.
The rise of AI has been a problem for Adobe. Despite a loyal customer base, emerging competitors have limited its ability to raise prices, stunting its growth. And the stock has fallen as a result.
AI stock 1: Duolingo
That’s in the past, but shares in Duolingo (NASDAQ:DUOL) have Strong Buy ratings from a number of analysts right now. And I’m wary of a similar risk with the stock at the moment.
There are already reports that ChatGPT 5 can help users learn new languages by providing an interactive teaching platform. And that could be a big problem for Duolingo’s core product.
As with Adobe, I’m not necessarily expecting the company to start losing money. But at a (P/E) ratio of 132, a lot could go wrong if sales growth misses expectations.
Duolingo is starting to expand beyond language learning and I think this could be a good idea. Right now, though, I have a very different view to the analysts who are bullish on the stock.
AI stock 2: Amazon
By contrast, I have a much more positive view of Amazon (NASDAQ:AMZN). Analysts also rate the stock a Strong Buy and I think the company’s scale makes it much more difficult to disrupt.
I’m sure AI products will emerge that challenge the firm’s market position. But I expect it to be able to defend this by integrating them (or similar versions) into its own offerings.
Amazon is deploying huge amounts of cash into AI infrastructure at the moment. If demand for computing power falters, there’s a risk this could be a big mistake.
Over the long term, though, I think what matters most is a strong competitive position. And I don’t see AI as threat to this with Amazon the way I do with Adobe or Duolingo.
Moats and AI disruption
I’ve been wary of investing in AI stocks for some time, because it’s been hard to tell who the winners and losers are going to be. But I think the picture is just starting to become clearer.
As always, the key is finding companies with durable competitive advantages. And that doesn’t just mean businesses that are using AI to improve their existing well-established products.
