The two sides of AI: How to view the AI stock boom

As the AI boom continues, especially after all of the hype after Nvidia's latest earnings, many on Wall Street will continue to double down on the sector and watch closely for any and all updates. But as the technology and use cases behind AI evolve, investors will need to change their perspective on the space too.

Yahoo Finance Tech Editor Dan Howley joins Yahoo Finance to discuss why he believes that AI markets should be viewed as two separate categories: Physical hardware and products & services ran by tech companies.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video transcript

- NVIDIA shares, as we mentioned, are soaring today on the back of that strong fourth quarter earnings beat. But it's the entire Semis sector that's rising as well today. So as we look ahead, how should markets be viewing the future of AI? Let's bring in Yahoo Finance's very own Dan Howley for more.

DAN HOWLEY: Yeah, I mean, look, we just saw the semiconductors there. And I think the big thing to keep in mind when you're looking at AI is it's two pieces. It's the semiconductors that are powering it, literally powering it, and then the AI that is running it.

So it's two areas to look at. Yes, the Semis are going nuts right now, except for Intel. But the flip side of things is Microsoft, Google, Meta, Amazon, they're all running AI and they're all offering AI to some degree or another.

Microsoft, Google, Amazon, to enterprise meta open source Google open sourcing. As well Salesforce, they have AI as well. Einstein GPT and then Slack has its own AI now. So it really is a segment that you have to look at in two pieces.

- And, Dan, we were actually talking off camera about this. And I just want to get your take. When people think of NVIDIA still, they think chips, they think hardware.

But we were talking about how really when you look at what Jensen was building there. It really is more of a platform at this point.

DAN HOWLEY: I mean, the way that Apple has managed to lock in customers--

- Which is a great comparison, by the way. It's a great comparison.

DAN HOWLEY: Hell, yeah. The way Apple has managed to lock in customers with its software services-- its hardware, you want to stay on the software, so you're going to get the hardware. You want to get the hardware, you're going to get the software with it.

It's the same thing with NVIDIA. You're going to buy their chips, you're going to get on CUDA. If things are running on CUDA, then you're going to go and get their chips again. So it's kind this virtuous cycle for the company itself.

But it's also part of the reason why you're seeing third parties try to develop their own chips because they don't want to be locked in. And same thing we saw almost with the cloud at first, right?

People were jumping into the cloud, and they were saying, oh, I'm all in on Amazon, or, oh, I'm all in on Microsoft. The smart people said, I'm not going to stick on one. I'm going to go Multicloud.

And now everybody goes Multicloud. So you're not stuck with one company. That's what these large cloud service providers, CSPs, for those in the know, are doing with their chips.

They're ensuring that they have, sure, we'll have our NVIDIA chips. But we're also going to have our own. And we're also going to have some from AMD or Intel to diversify what our customers want, but also what we want.

JULIE HYMAN: And so if investors are looking at the two sides of AI, if you will, looking at the hardware and software or the chip makers, and then the companies that are making the product, AI product, how should they think about that? Is one more attractive than the other, or is it just that there are a lot of choices in terms of how to invest in AI right now?

DAN HOWLEY: It's almost one is leading the other. You had the software come out first. And now everybody saw what the software was capable of with ChatGPT.

And they were like, well, we got to get in on this. We'd be bozos if we didn't. So now everybody's trying to ramp that up. And so they're going into the chips.

Now, you're going to have to see-- and we're trying to see this with the likes of Microsoft and Google and Amazon. How much is that investment paying off for them, which will then lead to more chip sales if it does well, right?

Because if everybody goes continues to go all in on AI, it continues to perform well for these companies. Well, then, I mean, it's a no-brainer, you would want to invest more if you're a smaller company or a mid-sized company because it's proven that it can do well. Then it's going to go right back into chips.

- Well, Dan Howley, always great to have you on set.

DAN HOWLEY: I like getting--

- The energy brings the insight. Everything's there.

DAN HOWLEY: Mainline me some Dunkin' and I'll be--

- Thank you, Dan. Thank you.