On Thin Ice: 3 AI Stocks at Risk After Failing to Meet EU Standards

AI stocks may look as if they’re never slowing down, but that’s not true.

OpenAI, the developer of ChatGPT, actively lobbied the European Union to impact upcoming AI regulations.

Recent reports reveal that OpenAI’s proposed amendments to the EU AI Act, which were later included in the legislation, were approved by the European Parliament on June 14th.

Brussels is taking a bold step to establish worldwide standards for technology used in diverse applications, such as OpenAI’s ChatGPT, surgical procedures, and bank fraud detection.

Brando Benifei, a member of the European Parliament working on the EU AI Act, described it as a momentous event. Lawmakers have approved the draft version of the Act and will now undergo negotiations with the Council of the European Union and EU member states prior to its enactment.

That said, some AI stocks are still at risk of not meeting the EU’s standards. Google, Microsoft, IBM, and Meta Platforms have all failed to comply with the strict regulations and could face sanctions if they don’t make the necessary changes.

Here’s a closer look at each of these AI stocks and their potential upside and risks.

Microsoft (MSFT)

Microsoft (NASDAQ:MSFT) secured an advantageous position in generative AI by making substantial investments in OpenAI, the developer of ChatGPT.

Today, Microsoft incorporates OpenAI’s generative AI technology into various products like the Bing search engine and Azure cloud services.

Despite Microsoft’s most recent earnings report being in April, reports of the company achieving “record high valuation” and its stock reaching new highs are consistently surfacing.

With its ongoing integration of AI technology and expertise acquired through a $10 billion partnership with OpenAI, Microsoft has the potential to achieve substantial earnings growth.

As a result, MSFT emerges as a strong contender among highly valued stocks with the potential to reach the $10 trillion mark.

However, there is one thing investors should also look into. Microsoft, a global leader in AI alongside Google, expressed support for the progress made on the Act while highlighting the need for further refinement.

Emphasizing the importance of legislative regulations and international collaboration, a Microsoft spokesperson stated the significance of voluntary actions taken by AI developers and deployers.

International Business Machines (IBM)

International Business Machines (NYSE:IBM) is commonly associated with consulting, software, and early-model computers.

However, IBM is also actively involved in the blockchain industry. Despite being primarily known for other areas, IBM operates as a secure and diversified firm with a broad technology presence.

IBM is an excellent choice within a traditional retirement framework. As a well-established legacy tech giant, IBM offers promising AI initiatives and a reliable source of passive income.

With IBM Watson at the forefront of intelligent digitalization, the company leverages its robust platform to scale AI protocols across multiple cloud environments.

However, IBM has urged EU policymakers to adopt a “risk-based approach” and proposed four “key improvements” to the draft Act, aiming for enhanced clarity on high-risk AI applications.

The Act’s enforcement, projected for 2026, may undergo revisions due to the rapid advancement of AI technology. Since its inception in 2021, the legislation has already undergone multiple updates.

Meta Platforms (META)

Meta Platforms (NASDAQ:META) has witnessed a substantial increase in its share price, outperforming the Nasdaq by over 100% due to various factors.

While strong profitability and growth are prominent highlights, the company’s significant investments in the metaverse also bring forth potential risks. Investors should be mindful of these risks, as they were factored into the stock’s valuation last year.

Violating AI regulations can result in severe penalties, including fines of up to €40 million ($43 million) or up to 7% of a company’s worldwide annual turnover, whichever is higher.

This surpasses the fines imposed by the General Data Protection Regulation, where Meta recently faced a €1.2 billion ($1.3 billion) penalty. GDPR imposes fines of up to €10 million ($10.8 million) or 2% of a firm’s global turnover. The AI Act’s hefty fines serve as a clear message from legislators, emphasizing the importance of compliance.

On the date of publication, Chris MacDonald has a position in META. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Chris MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.

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