Chris’ note: The rise of artificial intelligence (“AI”) is impossible to ignore. These “thinking machines” are driving our cars… fighting against cyberattacks… and discovering breakthrough drug candidates faster than any human can.
But the release of AI chatbot ChatGPT last November has put this trend into hyperdrive. It’s become the fastest growing internet app in internet history.
And as you’ll see today, this is only the start of the AI trend. All week, our tech investing expert, Colin Tedards, has been shining the light on what’s going on and how you can profit. And today, he shares one of his top recommendations from among the world’s AI innovators. Unlike some AI plays, it’s still trading at a reasonable valuation. So read on…
We’re at the dawn of a new era…
Since the launch of ChatGPT last November, we’ve seen that computers now not only follow instructions… but also learn.
This means a boom in productivity across the economy, as AIs augment the work we do.
It also means gushing profits for companies with AI products and services.
I believe it will be even more lucrative over the next decade than internet stocks such as Amazon, Google, and Facebook (now Meta) were since they came on the scene.
And that’s saying something…
Since they went public, Amazon shares are up 144,683%… Google is up 4,409%… and Meta is up 675%.
Had you invested $1,000 in each at their IPO you’d have $1,500,670 today.
And you didn’t have to buy startups to profit. Microsoft was already a $22 billion company when the first commercial internet browser was launched in 1994.
Had you bought then, you’d be up 11,167%.
Apple was also already a large company when the internet started. It’s up 76,300% over that same time.
That’s why today and tomorrow, I’m sharing three of my favorite plays with you. These are all large-cap companies with the most to gain from the rollout of AI systems at scale.
ChatGPT can compose poems, pass exams, write movie scripts, and edit documents based on text prompts. It can even write computer code.
It’s sci-fi technology come to life.
But AI isn’t new…
In 1949, IBM coder Arthur Samuel built an AI system that could play checkers against a human opponent. Since then, we’ve used AI to transcribe speech, guide Mars rovers, assist highway driving, detect diseases, and spot credit card fraud.
You’ve likely been using AI for years. Personal digital assistants – such as Amazon’s Alexa − are an early form of this technology.
When we ask Alexa a question, it uses a technology known as natural language processing to understand what we’re saying and give us an appropriate answer.
But these AIs all had one specific use case. The developments we’re seeing in AI today are different. For the first time, we can train AI systems on vast datasets for a variety of roles.
This flexibility means that AI is accessible to nearly every business.
Slashing Costs and Boosting Margins
For instance, a major solar panel installer uses AI on satellite images to automate planning. That shaves about 25% off installation costs. So, it can pass some of that savings onto its customers and boost its margins.
Healthcare giant Procter & Gamble is using AI to cut its time and costs to develop new products. The company can ask its in-house AI to create a new soap formula. This saves costs without sacrificing its cleaning factor.
AIs can also help businesses slash costs… and boost their margins.
According to the CEO of IBM, Arvind Krishna, AIs will replace 30% of office jobs over the next five years.
That’s a massive incentive for companies to use AI.
Market research firm Grand View Research reckons the AI software market will grow at 37% annually until it reaches $1.7 trillion by 2030.
And consulting firm PwC estimates that AI will add $15 trillion to the world’s GDP by 2030. That’s 16% of last year’s GDP of $95 trillion.
The question for us as investors: How do we best capture a slice of that mammoth growth?
Innovators and Adopters
When I’m evaluating how companies will benefit from AI, I split them into two groups – innovators or adopters.
The easiest way to get your head around this is to look at the rollout of cloud computing.
Amazon is the perfect example of an innovator in the cloud computing space. It created its Amazon Web Services (“AWS”) division. And it became the first major player to offer cloud computing services.
Until 2017, AWS accounted for more than half the cloud computing market.
Netflix is a great example of an adopter. It uses AWS to stream movies and TV shows to its customers.
Rather than create its own cloud computing division, Netflix adopted AWS to cut down time. But management quickly realized that AWS could be used to support its streaming ambitions. Netflix was able to scale from 21 million customers in 2011 to 230 million in 2022 with the help of AWS.
The important thing to note is that both categories − innovators and adopters − were hugely profitable.
If you’d bought Amazon stock when it set up its AWS division, you’d be up 5,756% on that investment. And if you’d bought Netflix when it adopted AWS in 2008 for streaming, you’d be sitting on a 12,570% return.
Top AI Innovator
That brings me to my first recommendation – top AI innovator Advanced Micro Devices (AMD).
It makes semiconductors – or chips – that power ChatGPT and other AI systems.
Rival chipmaker Nvidia is the world’s No. 1 chipmaker for AI. But its shares have already rocketed 197% higher this year. That’s left it priced for perfection.
I’m not saying Nvidia can’t go higher from here. But the big moves have already happened.
That’s why I like No. 2 AI chipmaker AMD. For an opportunity as enormous as this, second place isn’t a bad position to be in.
And AMD is a bargain compared with its better-known rival.
Nvidia trades on a price-to-sales (“P/S”) ratio of 40.8. So, investors are pricing the stock at about 41 years of current sales. Maybe Nvidia can grow into that valuation. But it’s about 4 times the sector average. At that lofty valuation, any slight misstep will send the stock tumbling.
AMD trades on a P/S ratio of 8.01. So, investors are pricing the stock at a much more reasonable 8 years of current sales.
And remember, AMD doesn’t have to dethrone Nvidia to have a great AI business. There’s so much demand for these chips, there’s plenty of room for a close competitor.
And AMD is coming out with a cutting-edge AI chip later this year.
These Chips Make AIs Run Faster
The MI300 chip is an innovation in chip design, architecture, and capabilities. So, it helps AIs run faster and do more tasks.
The MI300 also cuts the space and energy needed to run an AI system like ChatGPT. That saves on the cost to start and maintain an AI data center.
It takes several years of research and development to develop and bring out a new AI chip. So, I expect Nvidia and AMD will have this market largely to themselves through 2024.
Analysts expect AMD to ship 70,000 of its new AI chips this year. About 40,000 of these will go in the El Capitan supercomputer from Hewlett-Packard. It will be the world’s most powerful computer when it goes live.
By comparison, Nvidia is likely to ship more than 400,000 of its H100 AI chips in a single quarter.
But I suspect Amazon will show up as a buyer of MI300 chips for its data centers. Meta could also be a buyer. That would give AMD’s sales a bump.
AMD makes $5 billion to $7 billion in quarterly revenues across all products. If Amazon or Meta become customers for its MI300 chip, this will send AMD sales… and its share price… soaring.
Nvidia may be the king of AI chips. But there’s still plenty of money to be made if AMD can cement its position in second place.
An Even Bigger AI Opportunity
It costs hundreds of millions of dollars to build AI hardware such as the MI300 and the H100 AI chips.
So, most AI innovators will already be multi-billion-dollar companies.
The field of adopters is far bigger.
These will range from tiny start-ups to Fortune 500 companies.
What we’re looking for are companies that can use AI to dramatically increase sales or cut costs.
It’s also important to find the companies that have first-move advantage in adopting AI. That will allow them to steal market share from bigger and slower moving competitors… and quickly capture new markets.
For two of my favorite AI adopter stocks, make sure to tune in tomorrow. I’ll share their names and tickers with you, along with why they stand to profit from the AI boom.
Editor, The Bleeding Edge