Why Advisors Are Betting on AI Infrastructure Over Apps

Sure, artificial intelligence can power fun new tools for writing emails and generating images, but it’s quickly becoming much more than that. 

The technology has filtered into virtually every aspect of daily living and working, all powered by technologies that are evolving and expanding at an unfathomable pace. For some financial advisors who’ve been around for a while, this might feel like the early days of the internet and the ensuing dot-com bubble period when investors drove valuations sky high. But even with logical comparisons to that era, this is different because AI, in many respects, is evolving in a nearly organic fashion, with technologies developing technologies. 

From an investing perspective, it would be difficult to ignore such powerful performance as the 464% gain this year by SanDisk, or the 240% gain by DigitalOcean as investors chase the leaders in AI infrastructure and storage developments. Even legacy tech companies like Intel and Dell Technologies are riding the AI waves with gains this year of 197% and 107%, respectively.

“The AI arms race has become the stock market’s growth engine,” said Seth Hickle, chief investment officer at Mindset Management. “As AI-related companies have continued to show improving fundamentals, our models have naturally increased exposure across core portfolios,” he added. “We are still in the early innings of the AI enlightenment, and I think we need to be aware of how crowded this trade can become.”

Move Over

Finding the next successful AI trades may require a new way of thinking about market categories. While some consider AI a novel technology, others are treating the segment more like a multi-decade infrastructure cycle, said Haley Schaffer, founder and managing partner at Waypoint West. Instead of emphasizing the models, applications and companies building AI products, Schaffer said, she is concentrating on “what sits beneath.” “We’re focused on data centers, power and energy infrastructure,” she added. “AI may be digital, but scaling it is a physical investment problem, and that’s where we think durable capital gets deployed over the next decade.”

Mitch Stein, founder and principal at Arena Private Wealth, is embracing a similar strategy by targeting the picks and shovels, beginning with “inference infrastructure.” “Our thesis is straightforward: Infrastructure gets built once at this scale, and the companies that capture market share early are positioned to define what comes next,” he said. “Reaching a billion, or even a trillion, in market value is really just the beginning for a company built to do something foundational.”

The infrastructure angle is a more defensible bet than any of its applications right now, said Jeffrey Judge, managing partner at Chesapeake Financial Planners, who has studied the AI risk-reward scenario. “The picks-and-shovels story has historical backing; you make money selling to everyone racing for the prize, not guessing who wins,” he said. “That doesn’t mean app-layer plays can’t work, but the dispersion of outcomes there is enormous.”

Don’t Get SaaS-y

So how can advisors go about tackling the massive infrastructure buildout currently lying underneath all the new AI tools? While there are multiple ways to gain exposure to the AI market, the key may be being nimble and flexible. And that includes being able to ride waves of volatility. “We need to look beyond just the buildout and identify opportunities where AI is disrupting the norm,” Hickle said, referencing the so-called SaaSpocalypse that rattled financial markets in early February. 

That brief, but extreme, market panic, triggered by a shift from software tools toward autonomous agents, wiped out billions in market share:

• Analysts estimated $285 billion in global SaaS market value vanished on Feb. 3 alone. 
• More than $1 trillion in total software and tech valuations was wiped out within a few weeks of the event.

“The SaaSpocalypse is less about software becoming obsolete and more about the market repricing the competitive moats these firms once enjoyed,” Hickle said. “As AI adoption becomes standard, the biggest disruptions it may ultimately create are still largely unknown.”

The A&I 500

Some advisors are comfortable taking a more passive approach to the AI market by accepting that the technological evolution is so expansive and far-reaching that just being invested gets you exposure. “If you’re at all invested in the S&P 500, you’re going to be invested in companies putting resources into AI,” said Bryan Byrer, owner of Millennial Financial Planning. 

“Unless you want hyper-exposure to AI, you don’t need to do anything to gain exposure,” he added. “I don’t know if it’s going to be the panacea that people think it will be, because there’s going to be a swing of the pendulum back to people and personal experiences.”

Matt Parenti, a partner at Private Vista, is also taking the broad market approach versus trying to pick winners and losers. “There are certainly ways to invest directly in the AI theme like any sector trade; however, we prefer to gain exposure and diversify like we would any theme,” he said. “I think it’s healthy to view these investments as a piece of the diversified portfolio, otherwise it becomes a tactical bet.”

Judge, of Chesapeake Financial Planners, has combed through client portfolios to determine where AI exposure is already present.

“A client I work with recently was shocked to find that his S&P 500 index fund had more than 30% of its weight in companies whose entire growth thesis is AI, and the client didn’t think he owned AI at all,” Judge said.

For those clients who want more direct exposure to AI, Judge turns to broad technology ETFs “where AI is baked into the thesis,” such as Invesco QQQ Trust (QQQ). For more specific AI exposure, Judge uses Global X Robotics & Artificial Intelligence (BOTZ) and Robo Global Robotics and Automation Index (ROBO).

“Clients are definitely interested in AI investing,” Judge said. “Two years ago, it was curiosity, but now it’s urgent. The fear of missing out is real, and my job is to make sure that urgency doesn’t override risk tolerance.”

Dot-Com Bomb. All the attention being paid to AI investing feels very similar to the dot-com boom, which has some advisors taking a cautious approach. Keep in mind, many of the companies that helped create the modern internet were never profitable and no longer exist, said Greg Furer, chief executive officer at Beratung Advisors. He suggests looking past AI toward companies that are using the technology to reduce costs and deliver better products.

“The real winners in the AI space are going to be the companies using artificial intelligence as a tool to make their product better and their processes more efficient,” he said. “A lot of the pure-play AI companies have a long path to profitability. Their revenue numbers can look impressive, but revenue is not the same as earnings, and earnings are what eventually drive long-term shareholder value.”