| DAILY ISSUE Why the Companies Using AI Will Beat the Ones Building It VIEW IN BROWSER Hello, Reader. Companies all around us are racing to build the framework of artificial intelligence. Hyperscalers like Amazon.com Inc. (AMZN) and Alphabet Inc. (GOOGL) are straining their balance sheets to throw hundreds of billions of dollars at data center infrastructure… Utilities are rushing new power generation online… And chipmakers are booking orders years in advance… Of course, the companies building AI technology and infrastructure are essential. After all, they sparked the AI boom. And, in many cases, they’ve received quite the “bang” for their fleeting “buck.” Amazon and Alphabet, for example, have seen gains of 151% and 259% respectively since the start of 2023, as they go “all in” on AI. But investors should remember one important fact: Just because a company is first to build, scale, and reap the rewards of a new technology doesn’t mean it will be the last – or even the most profitable. These “first” companies – the AI Builders – do the hard work. That’s the Amazons and Alphabets. They spend billions, take big risks, and build the AI world from scratch. But it’s the “second” set of companies – the companies that apply AI – that are set to make the biggest profits. That’s because, over time, growth fluctuates and demand becomes less predictable. AI Builders face rising costs, competition, and pressure to keep innovating just to stay ahead. That leaves room for the AI Appliers to step in. They’ll start using the technology, improving efficiency, and growing profits more easily. But you don’t have to just take my word for it: History has proven this pattern time and time again. So, in today’s Smart Money, I’ll share two real-world examples where applying a breakthrough proved more profitable than inventing it – illustrating why AI Applier companies are an attractive investment. Then, I’ll share how I choose the best AI Appliers for my portfolio, and how you can, too. Let’s jump in… Railroads: The Original Template Moving away from today’s AI rails and toward those made of steel, railroads of the late 1800s and early 1900s were not just for transportation. They were a transformational commercial platform. They were the data centers of their era: massive fixed-cost systems built ahead of demand, financed with debt, and heralded as essential to the future of civilization. Railroad companies raced to lay track first, not because current demand justified it, but because future demand would. The problem was that everyone thought the same way. By the early 1890s, America was neck-deep in rail capacity. Tracks crisscrossed the Northeast and Midwest in redundant webs that greatly exceeded demand. As a result, hundreds of railroads failed to turn a profit, which created space for The Campbell Soup Company, now The Campbell’s Co. (CPB), to prosper. Headquartered in Camden, New Jersey, Campbell built its empire on the exact rail network the Philadelphia & Reading Railroad painstakingly assembled over decades. The company transported produce by rail from the Midwest to canning facilities in New Jersey, and then rolled boxcars of tomato and cream-of-celery soup across the country. Then, in 1897, chemist John Dorrance helped dramatically reduce the effective cost of shipping soup nationwide. He developed a method to make “condensed” soup by removing most of the water during production. If the rails had not already existed, Dorrance likely never would have bothered trying to condense Campbell’s soup Thus, a food empire was born. The invention of condensed soup turned Campbell from a small regional food company into an iconic national brand. Fiber Optics: The Rails of the Internet Fast-forwarding a century, the birth of the internet in the late 1990s triggered another massive infrastructure gold rush. Telecom companies laid vast fiber-optic networks across continents and under oceans, convinced that internet traffic would surge immediately. They financed those builds with debt, equity, and exuberance. They were right about the future, but disastrously wrong about the pace of demand growth. By the early 2000s, the world was swimming in dark fiber. Bandwidth prices collapsed, and billions of dollars vaporized. Bankruptcies followed. Companies like Global Crossing, 360networks, FLAG Telecom, and Williams Communications lined up in bankruptcy court. But the fiber didn’t disappear. It stayed in the ground. And once capacity became abundant and cheap, it unlocked an entirely new digital economy: streaming, cloud computing, search, e-commerce, and social media. Netflix Inc. (NFLX) didn’t build fiber, Alphabet didn’t dig trenches across the continent, and Amazon didn’t lay undersea cable. They built economic engines and empires atop the communications infrastructure that bankrupt visionaries created. Cisco Systems Inc. (CSCO), one of the prominent “builders” of the Internet, saw its shares skyrocket more than 4,000% during the final years of the dot-com boom. Then, as the boom turned to bust and internet exuberance turned to exasperation, Cisco's shares utterly collapsed. They spent the ensuing 26 years “underwater,” until finally regaining their peak price this month. (In case you’re wondering, Amazon shares soared more than 5,500% over this identical timeframe.) How to Find AI Appliers To summarize, demand growth is real, but its pace is uncertain. And even when demand does arrive, no one knows what price it will pay to ride AI’s digital rails. If history is any guide, today’s AI Revolution will reward very few builders, but it will reward thousands of appliers. It will enable thousands of seemingly ordinary companies to become extraordinary successes. For example, a logistics company won’t win by running the most advanced data center. It will win by using AI to optimize delivery routes, reduce idle trucks, cut fuel costs, and transport goods more efficiently. From the Philadelphia & Reading Railroad to today’s AI data centers, history repeats itself: Those that apply breakthroughs find more success than those that invent them. Today, the builders of AI technologies are racing for profits. Let them. They will not likely be the companies that walk away with it… at least not without life-threatening wounds. In fact, next week, the fate of one of the most important AI Builders, Nvidia Corp. (NVDA), will become clearer when the chip king announces fourth-quarter earnings. The company’s capex spending is at an all-time high, leading investors to expect Nvidia to report impressive growth. Regardless, Nvidia remains in a vulnerable position since the stock is priced to perfection. Plus, the company has many others depending on it. Any mishap could quickly send the stock down and ripple through the market. That’s why it’s time to identify the AI Applier companies poised to profit from AI’s next stage. For the members of my Fry’s Investment Report service, our portfolio holds many different kinds of AI Appliers that are efficiently using AI without betting the balance sheet on building the rails. From manufacturers to healthcare providers, the companies that quietly integrate AI into existing businesses may seem relatively boring at the outset. But they are the ones that will dazzle over the long term. They don’t attempt to build or own a revolutionary technology. They figure out potent ways to apply it. To learn more about these companies and how to capitalize on this moment, join me at Fry’s Investment Report today. Regards, | 
Post a Comment
Post a Comment