How to target the different layers of the artificial intelligence buildout

Right now, investors are heavily researching and gaining exposure to artificial intelligence shares. However, there are many layers to the artificial intelligence buildout. 

• Pure-play artificial intelligence companies – Companies whose main business is building AI models and software. A direct bet on AI.
• Hyperscalers – Big tech companies like Microsoft and Amazon that spend heavily on AI and make money through their cloud and AI products.
• Picks and shovels – Companies that provide the infrastructure AI needs, such as data centres, chips, memory, power, and cooling.

There are pros and cons to each part of this chain. The choice comes down to each investor's individual goals and beliefs on the AI buildout. 

What are the pros and cons?

Firstly, looking at the pure-play companies, the positive to targeting these stocks is you have the highest direct exposure to AI growth. This gives you potential for exposure to rapid revenue growth if a company's AI product takes off.

On the flip side, there may be a higher risk and volatility. 

Competition is intense, valuations can be high, and companies may struggle to turn AI demand into profits.

Looking at the hyperscalers, these huge existing businesses provide diversification. 

Strong cash flows allow them to spend billions on AI infrastructure, which can generate revenue through cloud, software and advertising. 

However the negative side is that AI is only part of the overall business, so upside is less concentrated. 

Additionally, massive AI spending also creates high capital requirements and potential pressure on returns. 

Finally, the picks and shovels stocks. 

The argument for these companies is that you can benefit from many AI companies spending on infrastructure, rather than needing one AI model to win. 

The main drawback is that these companies are often capital-intensive and cyclical, making them vulnerable to oversupply, falling prices and shifts in AI infrastructure spending.

How to target each layer

For investors looking for options at each level of this buildout, there are several ASX ETFs to consider. 

For investors looking to target pure-play AI, one option is the Global X Artificial Intelligence ETF (ASX: GXAI). 

It offers exposure to companies directly involved in AI, including AI software, services and supporting hardware.

For investors looking for exposure to hyperscalers, an option to consider is BetaShares Nasdaq 100 ETF (ASX: NDQ). 

It provides exposure to major US tech companies investing heavily in cloud and AI products. 

Finally, for investors seeking a picks and shovels approach, Global X Ai Infrastructure ETF (ASX: AINF) and Global X Semiconductor ETF (ASX: SEMI) are worth considering. 

They focus on the physical backbone of AI, including power, data centres, semiconductors, connectivity and raw materials.

The post How to target the different layers of the artificial intelligence buildout appeared first on The Motley Fool Australia.

Motley Fool contributor Aaron Bell has positions in BetaShares Nasdaq 100 ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, BetaShares Nasdaq 100 ETF, and Microsoft. The Motley Fool Australia has positions in and has recommended BetaShares Nasdaq 100 ETF. The Motley Fool Australia has recommended Amazon and Microsoft. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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