In 2023, the market has risen most quickly in AI stocks. This might only be the beginning.
How much a year can change. The worst year for Wall Street since the 2008 Great Recession ended in December. The economic clouds have cleared eight months later. Since their most recent lows, all three of the major market indices have recovered more than 20%, prompting some market observers to predict the start of the next bull market.
What sparked this turnabout? Numerous factors could be at play, but many observers will highlight recent developments in the area of artificial intelligence (AI). The release of ChatGPT around the end of last year demonstrated the expansive potential of generative AI, which has subsequently greatly accelerated market growth.
Some analysts worry that the rally has gone out of hand given the rally’s significant runup over the previous year. Daniel Loeb, a billionaire, is not one of them.
According to him, these changes are “transformational,” and a “profound economic upheaval” is currently taking place. In his second-quarter letter to investors earlier this month, Loeb spotlights three stocks he labels “picks and shovels” despite the fact that many stocks could profit from the AI arms race.
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Loeb is well-liked on Wall Street.
On Wall Street, Daniel Loeb is a legendary figure. He is the CEO of Third Point, a hedge fund he established in 1995 and turned into a $6 billion financial behemoth with an initial investment of $3 million.
Loeb gained notoriety by taking risky swings. The most famous one was a public proxy battle with Yahoo! in 2011. The troubled online services business now possessed a 5% share from the activist investor. After pushing for reform, ousting the CEO, and winning board concessions, Loeb sold his stock and made more than $1 billion in profit.
Thus, Wall Street usually pays attention when Loeb speaks.
Loeb emphasized two watershed occasions from the previous year.
Loeb went to great lengths to make the case for AI in Third Point’s second-quarter investor letter.
He claimed that the technology “will have far-reaching effects” and contrasted its introduction to that of the PC in the 1980s, the internet in the 1990s, mobile devices in the 2000s, and cloud computing in the 2010s.
“We believe generative and other forms of AI could compare to the industrial revolution, but compressed into a period of months or years rather than decades,” Loeb added. He uses two “watershed events” as proof of the current state of affairs.
The first was the first-quarter financial report from Nvidia (NVDA -3.62%), which featured “astronomical earnings beat and forward guidance,” he said. The projection, which predicted sequential increase of 53% and year-over-year growth of 64%, was what truly caused people to take notice.
Given that Nvidia provides the semiconductors that are the industry standard for AI systems, this was the first undeniable indication that the AI revolution was well and truly under way.
Second, Loeb noted a recent statement made by Microsoft (MSFT -0.59%) on the starting price for its software products with generative AI.
According to the firm, Microsoft 365 Copilot will cost $30 per user every month, which according to Loeb “could increase revenues by as much as $25 billion or more in software sales alone.”
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Large increase in cloud computing
According to Loeb, the main three cloud infrastructure providers will be among the largest winners from this AI revolution: Microsoft Azure, Alphabet’s (GOOG -0.03%), Amazon Services (AMZN -0.11%), and Alphabet’s (GOOGL -0.10%) The Google Cloud.
According to Loeb, the “most direct consequence” of the large language models (LLM) that underlie generative AI becoming widely used is that it will “drive faster revenue growth for the three hyperscale cloud providers.”
As he notes, “LLMs require cloud-scale data storage and compute resources,” it is important to keep in mind that many of these systems will only be accessible through these cloud services.
In his words, “Microsoft, Amazon, and Google are the ‘picks and shovels’ of the AI gold rush” and will profit regardless of the outcome for everyone else.
Naturally, Loeb is referring to the well-known Mark Twain adage, “During the Gold Rush, It’s a Good Time to Be in the Pick-and-Shovel Business.” In this scenario, artificial intelligence is the gold rush, and Alphabet, Microsoft, and Amazon are the pick-and-shovel companies.
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The typical warnings
Since it is impossible to predict when stocks will decline, as the past few years have shown, corrections and bear markets are an inevitable element of investing. As a result, investors should focus exclusively on the long term.
Additionally, none of these businesses are the outrageous bargains they were a few months ago. Currently, the stock prices of Microsoft, Alphabet, and Amazon are 12 times, 6 times, and 3 times sales, respectively.
Although valuations shouldn’t be considered in isolation, I’d contend that each stock is still a good investment even at the current price. Their slightly high values could be explained by the secular tailwinds alone.
If Loeb is correct, as I firmly believe he is, then each of these equities might experience significant upside over the next ten years. Even if their valuations may appear to be excessive, the disruptive potential of AI could quickly help them grow into their multiples by causing a sharp increase in both sales and profits and igniting a rally that might last for years.
Should you make a $1,000 investment in Amazon.com right away?
I want you to know this before you think about Amazon.com.
Amazon.com was not included in the list of the top 10 stocks, according to the Motley Fool Stock Advisor analyst team, which was just released.
Since 2002, Stock Advisor has outperformed the stock market by a factor of three. They believe that there are ten equities that are better buys right now.
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