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AI stocks are soaring in a meme-like frenzy. Here’s why investors won’t have to rely on Reddit enthusiasm to sustain the rally.

Artificial intelligence stocks have seen a spike in investor interest, like meme-stocks did in 2021.The rise of ChatGPT has sparked a boom in AI-related stocks and chip-makers.

NurPhoto/Getty Images; Phil Rosen/Insider

  • Following a brutal year for tech, the rise of ChatGPT has sparked a boom in AI stocks and chip-makers.
  • Shares of both well-known and obscure companies have skyrocketed on even small updates related to AI. 
  • The frenzy bears some resemblance to the meme stock craze, but AI’s foundation is stronger, experts say. 

On the heels of a brutal year for Big Tech, the meteoric rise of OpenAI’s ChatGPT is providing a boost to some of the hardest hit names of 2022, with small firms and tech giants alike rallying on announcements related to the seemingly endless potential of artificial intelligence. 

The boom is reminiscent of the meme-stock craze that sent shares of companies like GameStop, AMC Entertainment, and Bed Bath & Beyond to the moon in 2021 — but this time, investors won’t have to rely on the enthusiasm of retail investors on social media to keep the rally going. 

Two years ago, institutional investors had taken large short positions in a handful of struggling companies, and retail investors — largely organized on Reddit’s Wall Street Bets forum — took it upon themselves to drive share prices higher with something akin to a community-wide buying spree.

The moves sparked a short-squeeze that crushed returns at a number of hedge funds with large short bets. 

But to Chris Natividad, the chief investment officer and co-founder of Equbot, which has an ETF powered by IBM’s supercomputer Watson, the comparisons between the meme-stock movement and AI hype fall short because the fundamentals driving each trend aren’t comparable.

“Retail investor and media response sentiment is similar, but the financial strength of the underlying AI companies and broad application of AI solutions as a whole suggests there is more upside to come,” Natividad told Insider.

While much of the meme-stock bandwagon stemmed from speculation and a sense of solidarity among retail traders, the companies they were targeting didn’t have particularly strong balance sheets or fundamentals. 

Meme-stock darling Bed Bath & Beyond, for instance, has started the year on the brink of bankruptcy, and one analyst this week described its fundraising efforts as a last gasp with shares heading to $0. 

Alternatively, companies caught in the AI hype are riding a wave of enthusiasm around the innovative potential of tools like ChatGPT, even if that potential remains a ways away from being reached. Chip-makers like Nvidia and Ambarella have seen significant gains year-to-date, and their products could be poised to bring in revenue for years to come. 

“AI stocks and AI solutions will continue to benefit from machine learning while the majority of meme stocks will not,” Natividad noted.

Shark Tank investor Kevin O’Leary echoed the sentiment, telling Insider that AI as an investment sector has vast potential. He’s currently in talks to take an equity position in ChatGPT creator, OpenAI.

Bot competition looks poised to grow, with Google, Microsoft, and Chinese tech giant Baidu each making strides with their respective AI tools.

“AI’s sort of the new, hot kid on the block,” O’Leary said. “Like the internet was 20 years ago. This is the next thing.”

Improving macro conditions for tech

It isn’t just company-specific news that’s driving AI names higher. The wider macro picture for tech could be shifting after a terrible showing for the sector in 2022. 

The Federal Reserve’s aggressive interest rate campaign last year weighed on growth names as investors flocked to less risky corners of the market. But with signs of easing monetary policy ahead, the sector could find its legs once more, according to Fundstrat.

Technical indicators have also improved, and skepticism around tech’s recent strength has led to an uptick in short positions, which could end up fueling more gains. With 20% of tech stocks still more than 75% off their highs, Fundstrat noted that a recovery is still in the early stages.

The Nasdaq “closed above the 200-day [moving average] for the first time since April 2022,” strategists said. “The technical picture has flipped positive.”

Read the original article on Business Insider