Why AI Won't Create a New Batch of Tech Giants — It Will Cement the Old Ones

Every investor dreams of finding the next big idea, the life-changing investment that can turn a modest portfolio into a fortune.

Many on Wall Street continue to dream big as society enters a new era, one of artificial intelligence (AI) and the excitement and hefty investments that have come with it. But thus far, many of today’s top AI stocks are familiar faces.

Ironically, investors probably shouldn’t be surprised at this. Even further, it seems that AI won’t usher in a new wave of giant technology companies. Instead, the same leading tech stocks — a group known as the “Magnificent Seven” — will likely remain the face of AI for the foreseeable future.

Here is why, and how that may impact your portfolio.

Don’t underestimate competitive moats

In medieval times, royal families would protect their castles by digging large moats to create a barrier of water and space between themselves and anyone who threatened them.

That concept applies to investing today. Often, companies that lead their fields over time begin to entrench themselves. Their sustained success creates hurdles that competitors find difficult to breach, much like a moat protecting a castle. These competitive moats come in various forms.

For example, a social media app becomes stronger as more people use it, a classic example of the network effect. The leading food, beverage, and household goods companies have brand moats; their products aren’t necessarily unique in form or function, but consumers are willing to pay more for those specific goods due to the name associated with them.

Moats aren’t invincible. Some companies have seen their competitive moats crumble due to poor business decisions or industry disruption. But if you look at any stock that has performed well over a long time horizon, you’ll almost assuredly spot at least one moat in action.

Competitive moats in AI are already forming

Experts believe that AI will grow into a multitrillion-dollar industry. It’s exciting, to say the least. But much of AI’s benefit, at least this early in the game, lies in enhancing existing applications and industries rather than blazing new trails. Even ChatGPT is arguably an evolution of the search engine.

Most of everything that involves AI today falls into two primary categories: infrastructure and consumer-facing products. In infrastructure, you have cloud computing and semiconductor hardware inside the data centers that power AI. Then you have the consumer-facing side, which includes large language models and chatbots, as well as emerging technologies such as self-driving vehicles.

For those who don’t know, the Magnificent Seven includes:

1. Apple
2. Alphabet
3. Amazon
4. Meta Platforms
5. Nvidia
6. Microsoft
7. Tesla

Well, guess what? These companies already dominate virtually everything listed above. Apple (iPhone) and Alphabet (Android) control the smartphone market, the most obvious personal device to apply AI to. Amazon, Microsoft, and Alphabet combine for roughly 63% of the global cloud market. Nvidia rules the data center AI chip market, with some estimates placing its market share as high as 92%.

What about generative AI for advertising and social media? Yep, Meta Platforms owns almost every notable social media app aside from X and TikTok, and half of the Magnificent Seven have digital ad businesses that each rake in tens of billions in revenue. Looking further into the future, Tesla and Amazon are already deep into developing humanoid robotics.

In total, these companies have a combined market cap of more than $22 trillion and generated over $2.1 trillion in revenue in the past 12 months alone. They have virtually unmatched financial resources relative to almost any competitor you can imagine.

These companies have built multitrillion-dollar empires on numerous competitive moats across their existing businesses and are leveraging those moats to create new ones in AI.

There will be exceptions, but it’s probably best to keep things simple

There will always be opportunities for innovative companies to disrupt the status quo. OpenAI did so with ChatGPT and has become one of the world’s most valuable companies in relatively short order.

However, those instances are few and far between. AI enthusiasm has created a strong bull market in the technology sector, and that will probably end at some point, taking many speculative AI stocks, often with little to no revenue, out with the tide.

Instead, most investors are likely best served by keeping things simple. While the Magnificent Seven stocks are probably too large to make anyone wealthy overnight and could easily suffer a severe decline if the AI boom unwinds, the reality is that these companies have an overwhelming long-term advantage in AI.

Their widespread dominance, fortress-like balance sheets, and enormous revenue streams make them the no-brainer stocks to own in these early years of the AI era.