MW AI is like the late 1990s internet boom. Here's how to avoid AI's Pets.com and find the winners
By Cody Willard
Focus on the many layers of technology and businesses that support, use or benefit from AI
The AI revolution is just getting started. The closest comparison of a technological revolution on this scale is the internet revolution that took place in the late 1990s and early 2000s.
When the internet came along, people could see that it would change the world, but in its early stages 30 years ago it was hard to predict exactly where all of the value from the internet would come from, and which companies would be the ultimate winners.
The internet's early winners included the providers of infrastructure to support the internet and PCs - Cisco Systems $(CSCO)$, Intel $(INTC)$ and Sun Microsystems, as well as user platforms including Yahoo and AOL. Yet the ultimate winners of the internet revolution are the biggest tech companies nowadays, including Alphabet $(GOOG)$, Amazon.com $(AMZN)$ and Meta Platforms (META).
Many of the internet darlings that captivated investors in 1999 and 2000 ended up being total busts, such as Pets.com and Webvan. Yet it's also ironic that the business models of Pets.com and Webvan were successfully implemented later, as Chewy $(CHWY)$, DoorDash $(DASH)$ and Uber Technologies $(UBER)$ can attest.
The point is that it is extremely difficult to even guess which companies today will benefit from the AI revolution. Even if you can see that a certain business model might work using this new technology, the timing or the execution might be wrong and your investment could still go bust.
The 'AI Tech Stack'
With this in mind, we have created what we are calling the "AI Tech Stack." In this, we have attempted to identify all of the different layers of technology and businesses that support, utilize or benefit from AI, from the company mining copper for wires that go in data centers to end products like Tesla's $(TSLA)$ Optimus Robot.
The AI Tech Stack includes companies from chip-makers to PC manufacturers (Zoom in on the pyramid image above and focus on the highlighted boxes on the right to see which stocks we've identified). We're not attempting to predict winners and losers from AI, but this logical framework in place will help us more rapidly and accurately predict winners and losers as real-life trends start to emerge.
If we do this correctly, we can maximize our odds of investing in companies that are attractively valued relative to their future value. We can see which companies are likely to profit from using or creating AI applications, and those that AI will likely destroy.
The AI Tech Stack includes both new and existing technologies/businesses that will benefit from AI. But just because a certain business might see some incremental benefit from AI does not mean its stock is a buy.
For example, new AI data centers will require a lot more power, so there will be increased demand for electricity, and electric utilities will likely benefit. However, determining the incremental electricity demand, the effect AI will have on pricing and the capital required to build new electricity-generating capacity is not easy. So it's hard to say with certainty that utility companies will increase their profits because of the AI revolution.
What we really want is to find pure-play companies that will benefit from AI to a much greater degree (thus presenting more upside potential) and that are now reasonably valued.
Therefore, we want to (1) identify all companies that fit anywhere in the AI Tech Stack; (2) identify the way in which AI creates value at each company; (3) if applicable, identify each company's "edge" when it comes to AI; and (4) quantify the potential value creation from AI over the next three to five years.
Keep in mind that the AI Tech Stack is dynamic. We do not claim to know all of the many applications that will be created using AI nor the precise amount of value that those applications will create. What is clear is that as the AI revolution moves into its next phase, the value created by AI will spread out and include many companies that currently are not obvious beneficiaries.
Willard and/or the 10,000 Days hedge fund are net long AAPL, ADBE, META, GOOG, AMZN, TSLA, INTC, TSM, ADSK, NET, RKLB, ROK, TCEHY, DIS, NFLX, WBD, QCOM, ASML, and NVDA. Positions can change at any time and without notice.
Plus: Something's got to give: European regulators crack down on AI as U.S. tech companies plunge into the market
More: Google considers charging customers to use new AI powered search tools: report
-Cody Willard
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 05, 2024 13:06 ET (17:06 GMT)
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