Robotics, Automation and AI Are the New FANG

The FANG stocks consisting of Facebook (ticker: FB), Amazon.com ( AMZN), Netflix ( NFLX) and Alphabet's Google ( GOOG, GOOGL) have been wobbling on their lofty platform of late.

From underwhelming performance to security breaches and geopolitical threats, these tech darlings aren't looking quite so darling anymore. "Many investors have been rotating out of FANG stocks and sectors, as they're falling off of all-time highs," says Sylvia Jablonski, managing director of capital markets and institutional ETF strategist at Direxion Investments in New York.

The question is if this fall is just a stumble in an otherwise strong race or the beginning of a longer-term trend. Some experts argue the drop in price is a buying opportunity, but others warn that the hurdles these companies face will only grow in the future.

"Smartphones and social media are not going away," says Craig Birk, executive vice president of portfolio management for Personal Capital in San Francisco. "If anything they'll likely become more important, but as we learn more about their impact on individuals and society, it's likely we'll start to see more regulation. That generally comes with higher cost and sometimes slower growth."

FANG are "phenomenal platform companies, but a lot of the growth you've seen from the FANG companies has been exploited," says San Francisco-based Bill Studebaker, chief investment officer of ROBO Global, an index, advisory and research company specializing in robotics, automation and artificial intelligence (AI) companies.

"It's the law of large numbers," he says. The larger a company becomes, the harder a growth rate is to maintain. These tech giants have simply outgrown their own growth.

But that doesn't mean it's all over for the tech industry. On the contrary , investors should simply be looking for new tech darlings to provide future growth. New darlings like robotics, automation and AI companies, or RAAI. With exponential growth potential and worldwide applications across every industry, these high-tech darlings seem destined to revolutionize our lives and investment portfolios alike.

[See: Artificial Intelligence: The 10 Best AI Companies]

Is RAAI the new FANG? Particularly late in the market cycle, when the FANG names look a bit top-heavy, the major AI and robotics-related indexes and their components can be a good place to find returns, Jablonski says.

"The FANG stocks were up over 40 percent on average last year," Birk says. "Some of that was due to strong earnings and sales growth, but more than half was due to valuation increases." In other words, "they got more expensive."

"If you're an investor in Apple right now, while you're not exactly late, you're certainly not early when you invest in an $800 billion market-cap company," Studebaker says.

Unlike the FANG stocks, RAAI is just starting to boom. "We're really on the cusp of one of the greatest technological innovation periods in the history of mankind," Studebaker says. "There's never been a more exciting time to be an investor in robotics and AI where the rate of change and innovation has become exponential."

RAAI is transforming industries. RAAI is revolutionizing the way we live and how companies do business. "There's a full-blown robotics arms race going on all over the world," Studebaker says. "Either you're using these technologies to enable your business or you're basically out of business."

Even the FANG companies use these technologies. Facebook relies on machine learning, an application of AI, to recognize faces in photos. Amazon has warehouses staffed with robots and is working to design homes staffed with its AI assistant Alexa. Netflix uses machine learning to provide curated movie recommendations and cut down on the data requirements for streaming video. Google has its finger in every pie, from cloud machine learning to automatic image recognition that can spot illegal fishing.

[Read: FANG Stocks: Which One is Leading in AI?]

The difference between RAAI and FANG is that while the FANG companies are using these technologies to enable their business, they're not directly profiting from its development, Studebaker says. RAAI is still only a tiny share of FANG revenues. To maximize your investment returns from RAAI, look for companies directly engaged in manufacturing or selling the technologies themselves, he says.

How to invest in RAAI. The trick, as with any new industry, is knowing where to put your money. As investors learned with the evolution of the internet and the dot-com boom, cherry-picking winners is often a loser's game.

The best way to mitigate the risk of picking bad cherries is through everyone's favorite D-word: diversification. "Try to capture the entire value chain of technologies and applications," Studebaker says. To do this, you need to target both types of companies: those that manufacture RAAI technology -- the computing, processing, sensing, and integration that makes AI and robotics possible -- and those that apply these technologies. These applications can be anything from logistics and warehouse operations to automation and health care.

For example, on the manufacturing side, you have companies like Intuitive Surgical ( ISRG), which develops robotic-assisted technologies, tools and services for surgical operations. Or Keyence (KYCCF) and Daifuku (DAIUF), which are key players in factory automation and trade in over-the-counter markets. And, of course, there's Nvidia Corp. ( NVDA). Known worldwide for its PC graphics, Nvidia is branching into AI for driverless cars.

But pick your companies carefully. "R&D has to be monetized, the actual projects and advancements have to be put to use and deemed effective," Jablonski says. You want companies with some track record for effectively implementing such technologies.

This is still a new area for investors and companies alike, so mistakes are bound to happen. When Nvidia suspended testing on its self-driving cars after a fatal Uber accident, its shares dropped more than 7 percent.

Limit your exposure. "The genie is out of the bottle; you won't put it back in," Studebaker says, but that doesn't mean you should invest everything you've got in RAAI.

[Read: How AI and Investing Are Merging]

Concentrating investments can have its rewards, but it definitely poses risks. Even the FANG companies stumbled out of the gate, says Studebaker, who suggests investors limit their RAAI exposure to no more than 5 percent to 10 percent of their portfolio.

Coryanne Hicks is an investing reporter for U.S. News & World Report. She is an expert at investing strategies and theories, investor education, investing psychology and behavioral finance. Previously, she was a fully-licensed financial professional at Fidelity Investments where she helped clients make more informed financial decisions. She has ghostwritten financial guidebooks for industry professionals and even a personal memoir. She is passionate about improving financial literacy and believes a little education can go a long way. You can contact her at crhicks@usnews.com.