Why Australia's AI Industry is Positioned for Remarkable Growth

Whether you do or don't like or use artificial intelligence (AI) technology, we can all agree that it's here to stay. From an investment viewpoint, if this sector can perform in Australia even remotely close to its American neighbour, we might be staring at a future goldmine for early investors. As such, let’s take a look at Australia's AI industry to uncover those companies at the forefront of the AI revolution. Before we do, let’s briefly examine the US market.

The Nasdaq Composite has recovered rapidly since the COVID-19 pandemic, rising over 55 per cent from the 2022 low. This is largely due to investment in AI-related companies such as AWS, Google, Microsoft, Meta and NVIDIA, with NVIDIA’s share price up over 60 per cent this year alone!

Which companies will prosper with the AI revolution?

Despite the Australian market being heavily weighted towards the financials and materials sectors, I believe the artificial intelligence industry is on the cusp of remarkable growth. This is being driven by the recent improvements in generative AI and a greater willingness to use AI in different industries. According to projections, AI spending in Australia is expected to reach US$6.4 billion by 2026, contributing to an estimated AU$22.7 trillion boost to the global economy by 2030. If that's not exciting enough, February saw the tech sector just have its strongest gains in one month!

So, with this increased interest in the sector, let's take a look at three companies that have caught my attention.

Appen Ltd (ASX: APX): Despite recent challenges, Appen remains a key player, providing data tools and services to global market players. The company’s new products are focused on generative AI applications, and with the share price trading at an all-time low, I believe the potential upside for investors in this stock is astronomical if Appen can get things right. It’s just too early right now to invest.

Next DC (ASX: NXT): NXT is Australia's leading data centre company. It operates 13 centres across multiple countries and is in partnership with Microsoft. The share price is currently trading at an all-time high, and rightfully so. Therefore, while I believe now is not the ideal time to buy this stock as I believe it has run a little too hard in the short term, I will be watching it like a hawk, waiting for the next opportunity.

Brainchip Holdings Ltd (ASX: BRN): Brainchip is at the forefront of AI reasoning and analysis. Most notably, it is known for its Akida Neuromorphic Processor, and the company is forecasting it will be operating in a market worth over US$1 trillion by 2030. To add further good news, it has posted one of its best months in recent history, up over 150 per cent for the month of February. Unlike NXT, however, which is trading at its all-time high, I believe BRN has plenty more upside potential in the short to medium term; therefore, this is one to watch very closely.

What were the best and worst-performing sectors last week?

The best-performing sectors included Information Technology, up 7.97 per cent followed by Consumer Staples, up 2.59 per cent and Real Estate up 2.34 per cent. The worst-performing sectors included Utilities, down 1.04 per cent, followed by Health Care, down 0.79 per cent and Communication Services, down 0.54 per cent.

The best-performing stocks in the ASX top 100 included Pilbara Minerals, up 19.35 per cent, followed by IGO Limited, up 14.80 per cent and Reece Limited, up 13.33 per cent. The worst-performing stocks included NIB Holdings, down 8.07 per cent, followed by Fortescue Metals, down 7.09 per cent and Ansell, down 4.75 per cent.

What's next for the Australian stock market?

If you had read my report at the start of February, you would have seen that I performed some seasonality analysis for the month, which resulted in statistics showing it would be a flat month. As we close out February, this is pretty much what happened. Last week also closed out the first round of reporting for 2024, which produced an overall upbeat result, with over 65 per cent of companies either beating or meeting expectations. Considering all the talk of recession and inflationary concerns, that's not bad.

If you’ve been keeping up with my reports over the last couple of weeks, you would know that I’ve been waiting for the All Ordinaries index to break its all-time high. Well, I can now finally post that it took until the last day of February for this to occur. This is exciting news for our stock market, and I anticipate the first week of March pushing our index even higher, providing us with upward momentum for at least the next two to three weeks. In last week's report, I provided possible levels of future resistance being 8,150 and 8,750 points, so keep a close eye on these levels.

What’s also interesting to note in terms of trading volume for February is that the Materials sector was the most active. Materials turned over more than four times the volume of the next best sector, which was Energy. This indicates that the materials sector was where most of the action was for traders and investors during the reporting period, so I'd encourage you to take a deeper look in this sector as you might find some hidden gems with the potential for fantastic returns.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.