Chris’ note: Shares in artificial intelligence (“AI”) chipmaker Nvidia have more than doubled this year. But don’t worry if you missed out. As you’ll hear today from tech investing expert Colin Tedards, it’s just the start of a wider AI boom.
Colin blew up on YouTube for his in-depth and jargon-free research of the world’s top tech stocks. And since he came onboard at Legacy Research, he’s been showing his readers how the AI boom will play out… and how they can profit.
Companies like Nvidia that make AI components are a crowded trade right now. But Colin says investing in companies using AI to fatten margins and boost their profits is still a relatively under-the-radar play.
And two overlooked sectors should be at the top of your shopping list…
In 1999, business leaders around the world were asking the same question…
“Should we have a website?”
The answer seems obvious now.
Of course, a business needs a website…
But in 1999, the internet was still new. And it was hard to tell.
Then, in 2007, business leaders were asking another key question…
“Should we be on social media?”
And the answer, once again, was yes.
Today, most companies use Facebook, Instagram, LinkedIn, and TikTok to engage with their customers. And the companies behind these platforms are among the largest in the world.
Now, another key tech question has arisen. And business leaders all want to know the answer.
“Should we adopt AI?”
As I’ll show you today, the answer will be another resounding yes.
Companies will use AI to bring down costs… fatten margins… and boost profits.
More direct AI plays, such as AI chipmaker Nvidia (NVDA), have gone to the moon this year. But investing in companies set to adopt AI is still a relatively under-the-radar play.
And two seemingly boring sectors will be at the vanguard of AI adoption.
Fastest-Growing App in History
By now, you’re likely aware of generative AI.
The best known is ChatGPT. It’s the AI chatbot from OpenAI that has read the internet and can answer just about any question you ask it like a human would.
There are also popular generative AI apps for images such as DALL-E and Midjourney.
But ChatGPT was the first generative AI to grab the world’s attention when it was released in November 2022. It reached 100 million users in two months. That’s faster than any other app in the history of the internet.
But researchers have been tinkering with AI for more than 70 years.
One of the earliest AIs was a program that learned how to play checkers. That was back in 1952.
Since then, AIs have translated languages… learned to drive cars and navigate roads… become the world’s best chess player… discovered new drug candidates… and guided unmanned probes to Mars.
But those were all one-off use cases. Each AI existed to solve a specific problem. Today’s AI systems are different.
Adoption at Scale
We can now train AI systems on giant datasets and have them perform a variety of roles.
ChatGPT, for instance, can compose songs, answer exam questions, and write computer code.
Specialized versions of it can be used as customer service agents… write marketing material… even provide live analysis on stocks and bonds.
This flexibility means AI is accessible to nearly every business in the world.
And just like in 1999 and 2007, they’re going to adopt it at scale.
The CEO of IBM, Arvind Krishna, told Bloomberg AI will replace 30% of office jobs over the next five years.
In IBM’s case, I calculated this would yield about $780 million in yearly savings. That would have boosted IBM’s 2022 profits of $1.6 billion by 48%.
That’s the kind of margin expansion most CEOs only dream of. And when margins expand, profits go up.
And it’s not just IBM. There’s a strong financial incentive to adopt AI across the board to boost profits. It’s why I’m looking beyond just a few big tech stocks to play the AI boom.
Thousands of non-tech companies will soon start racing to adopt AI and make their businesses more profitable as a result.
That spells opportunity for us as investors…
Follow the 7%
Consulting firm PwC calculates that AI will add $15 trillion to the world’s GDP by 2030. That’s 16% of last year’s global GDP of $95 trillion.
Most of the value added will come from increased efficiency. Work that AIs automate will be completed faster, cheaper, and more accurately than work humans alone can do.
Already, investors are rewarding companies for just saying they’re adopting AI.
Consulting firm Accenture found that when management mentioned AI on an earnings call, the chance that its share price would rise went up 40%.
But Accenture also found that only 7% of companies were actually using AI to make more money.
For those that were, the results were impressive. Companies in group were able to grow their revenue 50% more than their peers, on average.
For instance, a major solar panel installer uses AI on satellite images to automate planning. That shaves about 25% off its installation costs.
And Procter & Gamble is using AI to cut its time and costs to develop new products.
The company is asking an in-house AI to create a new soap formula that will save costs without sacrificing its cleaning efficiency. It can offer potential solutions that have a good chance of working. That cuts down on a usually lengthy and costly experimentation process.
Long story short, the 7% of companies using AI to build a better business are going to outcompete the 93% that aren’t.
And two sectors stand out as low-hanging fruit here…
Vanguard of Adoption
I’m talking about the insurance and finance sectors.
They’re down about 1% and 4% this year, respectively. But they’ll be among of the biggest beneficiaries of AI adoption.
Goldman Sachs estimates that AI will replace about 300 million jobs. Nearly half will be administrative and legal jobs, which are common in the insurance and financial sectors.
Based on my analysis, these cuts could boost profits by about 50%.
That means fatter dividends and higher returns… especially from boring companies like banks and insurers.
This opportunity won’t last forever. Over the next year, the results will be obvious in their financial statements. We’ll see higher sales and lower costs.
Meantime, if you want to get a head start, check out the iShares U.S. Insurance ETF (IAK) and the iShares U.S. Financials ETF (IYF). These will give you diversified exposure to two sectors that have most to gain from the AI boom.
Editor, The Bleeding Edge