Chris’ note: Yesterday, we looked at why the rise of artificial intelligence (“AI”) is the biggest investment trend of our lifetimes. And our tech investing expert, Colin Tedards, shared the name and ticker symbol of his favorite AI chipmaker.
Colin grew a 120,000-strong YouTube following before joining the team at Legacy Research. That’s down to his detailed breakdowns of the world’s top tech trends and the best ways to profit. And he’s made it his mission here at Legacy to help folks understand the power of AI… and its profit potential.
Today, Colin dives into his two top AI adopter stocks. These are companies that will benefit from the integration of AI systems into our everyday lives. And together with yesterday’s pick, they’re a great way to get exposure to the AI boom.
On June 13, Nvidia became the first chipmaker to join the Trillion Dollar Club.
That was the day the sum value of its shares passed $1 trillion.
Nvidia joined just three other club members – Amazon, Microsoft, and Apple. That puts it in the elite level of global tech stocks.
It’s all thanks to Nvidia’s H100 chips. They’re the “brains” of generative artificial intelligence (“AI”) systems such as ChatGPT, Bard, Midjourney, and DALL-E.
Nvidia controls about 90% of the AI chip market. And the company forecasts its sales will grow by 50% over the next quarter.
That makes Nvidia the obvious AI play to capture that growth. And its stock is up 190% so far this year.
There’s just one problem.
The company’s stranglehold on the booming AI chip market won’t last.
That’s why, in yesterday’s dispatch, I recommended you buy rival AI chipmaker Advanced Micro Devices (AMD) instead.
It’s the next biggest AI chipmaker after Nvidia. It’s about to release a direct competitor to the H100 chip. And it’s selling at a quarter of Nvidia’s valuation.
You can read my write-up on that here. Today, I want to introduce you to an even bigger opportunity to profit from the AI megatrend.
It costs hundreds of millions of dollars to build AI chips. So, most AI chipmakers will already be multi-billion-dollar companies.
The field of AI adopters is far bigger.
These are companies in sectors across the economy that can use AI to dramatically increase sales or cut costs.
Specifically, I’m looking for companies that have a 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.
And the first AI adopter on my list is the software company Adobe.
AI Adopter Play No. 1 – Adobe (ADBE)
I first saw Midjourney and other AI text-to-image generators in 2022. It creates all sorts of images based on text prompts.
I was immediately concerned about Adobe’s core business.
Text-to-images AIs use natural language to manipulate and create images. For example, you can type “show me a cat eating cake in the woods” and the AI creates it for you.
You can also alter an image using these systems. For example, changing the hair color of someone in a photograph or swapping in a new background.
An AI-Generated Image
Source: Midjourney
Up until now, a human would take painstaking hours using sophisticated image manipulation software such as Adobe’s Photoshop.
And initially, I wasn’t certain how quickly Adobe would adjust its legacy software to stay relevant.
To Adobe’s credit, it has responded quickly. In March, it rolled out a beta version of its own AI text-to-image generator, Firefly.
This is an AI system like Midjourney and DALL-E that generates and edits images based on prompts.
And in May, Adobe rolled out Generative Fill in Photoshop. This added some editing functionality using natural language.
These solutions help solve two issues for Adobe.
First, it gives Adobe industry-leading capabilities. Competition is still going to chew into some of Adobe’s market share. But the company will keep its enterprise accounts. Most companies won’t risk running afoul of copyright laws or having buggy programs from start-up AI firms.
Second, existing Adobe software has a steep learning curve. Using prompts to perform functions will help Adobe gain new users and lower the learning curve.
The advantage Adobe has over competition is the large stock images it owns since acquiring Fotolia – a leading marketplace for royalty-free images – in 2014, and its continuing investment in the image database.
Enterprise clients won’t want to risk infringing on copyrights and permissions when they use an image. Open-source or alternative generative AI systems carry legal risks these organizations can’t take.
Also, Adobe is working with its enterprise customers on a version of Firefly that uses custom generative AI models tailored to them. Here’s what Adobe CEO Shantanu Narayen said on its second-quarter conference call about this product:
The product is not yet available, but the number of customers who want to sign on in terms of wanting to use it has been one of the most successful launches that we’ve had.
And if Adobe can give white-glove-type support to large corporate clients and create custom generative AI solutions, it sharpens that competitive edge.
Adobe reported second-quarter earnings on June 15. Revenues topped expectations and grew 9.8% year-over-year.
Guidance for the third quarter and the full year on the revenue side were in-line with expectations of 10% revenue growth.
I see Adobe comfortably meeting its revenue growth target… with room for upside if enterprise adoption of generative AI tools accelerates.
AI Adopter Play No. 2 – UBER (UBER)
Uber’s ability to increase revenue and profits is partially limited due to competition domestically with rival ride-share company Lyft.
They’re constantly competing on price, driver incentives, and perks.
Uber’s plan is to squeeze Lyft operationally. It’s not even close to being profitable. This will force it to raise its prices.
And one way Uber is doing that is through AI-piloted self-driving cars.
Uber tried its own self-driving AI system. But lawsuits and tragic accidents marred its progress. And in 2020, Uber sold its self-driving unit to Aurora.
It’s the company behind Aurora Driver, an AI system you can put in cars for autonomous driving.
The R&D spend on self-driving was a drag on Uber’s earnings. So, this has improved its profitability. Even better, Uber kept a 26% stake in Aurora as well as two board seats.
Aurora has inked deals with Toyota and automotive components maker Denso to develop self-driving Toyota Sienna minivans.
If the initiative is successful, an obvious way to commercialize this technology would be to offer self-driving ride-hailing services.
And who better to partner with than Uber?
Even without the turbo boost from AI, Uber’s business is scaling. In the most recent quarter, Uber grew revenue 29% while keeping sales and marketing spend flat.
It’s well on its way to dominating ridesharing. It’s also creating meaningful business models around food delivery and freight. And it’s poised to be one of the early adopters of AI, too.
That’s a winning combination. And it makes Uber another great way to play the AI boom.
And remember, we’re just at the start of a multi-decade profit trend that will dwarf even the gains early investors made from internet stocks.
You can catch all my latest research – for free – over at The Bleeding Edge. It’s where I break down this AI trend… and more. So be sure to sign up for that here.
Regards,
Colin Tedards
Editor, The Bleeding Edge