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The Generative Artificial Intelligence (AI) wave, triggered by the launch of ChatGPT, made Nvidia the poster stock of AI in 2022. And from there began the race to adopt AI. Testing the waters, companies started investing billions in AI data centers, network communications, and training large language models (LLMs). The year 2023 saw an uptick in several small and large-cap tech stocks as they got cracking on the AI code.
Tech giants like HCL Tech, Tech Mahindra, TCS, and Tata Elxsi saw a 20-30% surge in 2023 and another seasonal surge in 2024. But how much of this surge can be attributed to AI? That is where the case for AI investment comes into the picture.
AI is a concept talked and researched about for decades and is now finally finding its way into commercial applications. While there is no doubt that AI is drastically changing the way we live and consume data, is it still too early to invest in AI stocks?
If we build up on what we learned from the dot-com bubble in 2000, when investors flocked to any business that used the internet, investing in something without understanding its return potential can come back to bite you. Hence, investors slowed their AI investments in 2024 and started asking the question, where is the ROI (return on investment)?
If you think this is only an Indian phenomenon, think again. Even tech giants in NASDAQ are asking the same question: “Show me the ROI”.
OpenAI, the company that built ChatGPT, is expected to report $5 billion in loss on a $3.7 billion revenue, as per an article by The New York Times that reviewed the financial documents of the company. According to a Reuters report, Microsoft, OpenAI’s largest shareholder, is using both internal and external AI models for its Microsoft 365 Copilot to cut expenses and diversify from OpenAI’s current foundational technology.
This is a strategic move by Microsoft. As an investor who injected $14 billion in OpenAI, Microsoft is now demanding ROI. The buzzword has shifted from generative AI to artificial general intelligence (AGI). Artificial general intelligence, according to Microsoft, is a system that can generate $100 billion in profits. Microsoft 365 Copilot has not yet demonstrated its value to businesses. However, the software giant that identified the potential of public cloud early and generated billions in profits is now searching for profits in AI.
The question is how can AI generate value for businesses and profits for investors. According to the McKinsey & Company Survey 2022, AI can generate value for different functions either by reducing costs or increasing revenue. For instance, AI can add value by helping marketing and sales boost revenue, and it can help supply chain management by reducing costs.
Generative AI is a system that can convert the human language of text, speech, and visuals into machine codes, analyse the data, and give you the desired output in the form of text, speech, and visuals.
AI can collate data, analyse patterns, reveal inefficiencies, and predict outcomes to help make smarter decisions. It can manage industrial robots, drive trucks, help design products, interpret MRI scans and X-rays, and deliver better services.
For an AI system to work efficiently, it needs to be trained on huge data sets and millions of parameters for a better output. In India, there is ample unused data, collected from digitization. The key challenge is to make that data AI-ready and have the computing power to process it.
It will require huge investments in the early stages as training AI models is expensive. Cisco’s Chief Product Officer Jeetu Patel, in a blog, stated that over $200 billion has been spent on training the most recent language models. However, only 10% of it has been realized in global revenue, and that too by only a few companies. Some companies are clear on their AI strategy while many are not, but they know they need to do it fast.
And that’s where the fundamentals of AI investing lie.
As per Cisco’s AI Readiness Index 2024, among the six pillars of readiness, Indian businesses do well in terms of strategy and talent readiness. However, gaps remain in infrastructure, data, culture, and governance readiness.
The only stocks that benefitted from the AI boom so far are semiconductor and data center companies. This is because money flowed into the AI infrastructure. From Microsoft to Reliance Industries to TCS, all large companies are buying Nvidia’s graphics processing units (GPUs) to build data centers that can handle AI computing. The money trail has led to investment in building an AI-ready infrastructure, making chip stocks flourish. In India, Moschip Technologies and Netweb Technologies benefitted from this money trail.
Netweb designs and manufactures high-performance computing solutions. Its order book ballooned from Rs 994 million as of 30 June 2023 to Rs 3.7 billion as of September 2024 (Q2FY24). Its income from AI Systems surged 229% year-over-year and contributed 14.8% to the Q2FY24 revenue. The company used the growing interest in AI to launch its IPO in July 2023 and raise Rs 631 crore. Its revenue and net profit surged more than 60% in FY24 as it executed orders.
However, Netweb’s stock price also surged 189% in a year since the IPO launch, and then the growth plateaued, with the stock rising only 8.9% between 26 July 2024 and 10 January 2025. One possible reason could be that the stock is trading at a price-to-earnings (PE) ratio of 151x, way above the industry median of 59.9x. Another reason could be seasonal weakness in the first half. Interestingly, foreign institutional investors (FIIs) increased their stake in the company to 12.13% in the September 2024 quarter from 9.69% in 2023.
Moschip Technologies’ stock price also followed a similar growth momentum, with a 255% rally between July 2023 and July 2024, followed by a 29% dip. Such cyclical rallies could come for the two stocks as companies expand and upgrade their AI infrastructure.
With the dream to become an AI-first nation and boost its digitization efforts, India is adopting AI. But the question is how can AI generate ROI for companies?
Like most tech stocks, AI is super competitive. LLMs are getting outdated in the blink of an eye. According to media reports, China’s latest AI model, DeepSeek, seems to overpower ChatGPT in both performance and cost. Companies are looking for a cost-efficient AI model that can generate profits.
In India’s case, we need a tailored AI that can address the need for accessible and affordable quality healthcare and education and improve agricultural productivity. And AI that can develop smart cities and solve traffic and congestion problems. Many AI startups are working on these lines.
Fractal Analytics is one such startup. It offers AI solutions such as Crux Intelligence for business intelligence, Eugenie.ai for sustainability, Asper.ai for revenue growth management, Senseforth.ai (conversational AI for customer service), and Flyfish (generative AI for Sales). Its latest solution is Qure.ai which uses AI to detect tuberculosis and lung cancer. It serves Fortune 100 & 500 companies like Google, Wells Fargo, and Reckitt Benckiser. Fractal Analytics evaluated the possibility of an IPO twice in 2021 and 2024. Many such AI IPOs could come in the coming years.
IT giants like Reliance and Tech Mahindra have laid out their AI strategy. However, the question is: are they making money from AI?
AI is still a new industry that needs five to eight years to start generating the desired returns. It is like investing in Zomato in 2011. Plus, stringent regulations could add another layer of volatility. However, AI is a space to watch out for as companies are firing all cylinders to make it work for them.
As an investor in futuristic technology, one should look for two things:
Tech stocks in India are enjoying the demand momentum. AI infrastructure companies like Moschip and Netweb are already seeing huge order books and a direct impact on their revenue. The next stage of AI growth will depend on how well companies can monetize their AI strategy.
The ones to crack this code and generate returns could see exponential growth and be trendsetters – something that could attract early-bird investors with a long-term investment horizon. But before jumping on the AI bandwagon, always study the company’s roadmap.
This is just the beginning of India’s AI story. It remains to be seen how India’s AI ecosystem develops and generates ROI for an individual investor.
Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
Puja Tayal is a financial writer with over 17 years of experience in the field of fundamental research.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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