Chris’ note: We’ve all watched the artificial intelligence (“AI”) megatrend take off on Wall Street this year… And the race is on to see which companies are going to come out ahead in the AI boom.
For companies that adopt AI early, it could mean windfall profits. But there’s even more at stake…
Because for those that wait too long to adapt their companies to use AI… it could mean getting left behind as this tech is established across industries and becomes more and more integral to our daily lives.
So, today, you’ll hear a cautionary tale from colleague and former Wall Street insider, Nomi Prins.
She shares another time a major company failed to adapt to a life-changing technology fast enough… And how we as investors can learn from it.
Do you remember Sears, America’s one-stop shop?
It was a household name for decades.
Its stores were everywhere in postwar suburban America.
And you could shop there for almost everything.
It sold clothing, washing machines, TVs, children’s toys, jewelry, and furniture among a range of day-to-day goods.
You could even buy a home there. Through the “Sears Modern Homes” program, you could order home-building kits for shipping and assembling on-site.
And if you couldn’t find it in the stores, you could order it from the Sears catalog.
This brought the same wide selection to homes across the country, including hard-to-reach rural areas.
If you were like many Americans, you’ve done your holiday shopping there.
But a technological megatrend caught Sears off guard. It failed to adapt its business model to the internet age. By 2010, Sears was closing stores and laying off employees.
As of June, there are 11 total Sears stores remaining. Ten in the mainland U.S., and one location in Puerto Rico.
And as you’ll see today, the retail powerhouse turned e-commerce casualty offers a lesson for companies that risk falling behind the AI adoption curve.
Sears’ Make-or-Break Moment
What killed off Sears?
Jeff Bezos and his online retailer, Amazon.com.
In 1997, while Sears’ stock was soaring, Amazon was an upstart online bookstore.
But a year later, Amazon started also selling music and DVDs.
Then it expanded into movies, music, home improvement products, toys, office supplies, clothing, toiletries, gourmet foods, electronics, sporting goods, and more.
By 2003, when the internet was really starting to take off, Amazon had 41 million active customer accounts. And it was the go-to destination for online shopping.
It made thousands of products available at your fingertips without stepping out of your house.
And Sears?
It launched a website in 1999. But it struggled to compete with Amazon’s low prices, wide selection, and convenient online shopping experience.
And that crushed its stock price.
In 2013, Sears shares traded for about $50. Then it fell off a cliff…
By 2018, you pick up shares in Sears for $2.42.
That’s a ruinous loss of 95%.
Amazon’s E-Commerce “Bet”
What about Amazon?
Today, it’s the undisputed heavyweight champion of U.S. retail.
But it’s also more than that.
It’s also a technology conglomerate with interests, cloud computing, movie and TV production, streaming media, and artificial intelligence.
It seems like Amazon has its fingers in every pot.
But this only happened because Amazon made the right bet on e-commerce and the internet.
Today, more than half of all online shoppers go to Amazon first to search for a product.
To get a sense of the returns on Amazon’s “bet” on e-commerce, here’s a chart of the company’s stock price (adjusted for its many share splits)…
The company’s shares had plunged more than 90% by April 2001. But because the gains that followed were so high, you hardly see the dot-com bust on its stock chart.
And here’s what this kind of performance means…
Suppose you invested $1,000 in Amazon stock in the early 2000s and let it ride. Your investment would be worth nearly $500,000 today.
And if you had seized the opportunity to invest $1,000 in Amazon in 1997 when it went public, it would be worth $1.8 million.
That’s a 179,900% gain.
The “Sears vs. Amazon” Moment for AI Is Now
The 1990s and 2000s were times of growth and innovation for the retail industry.
But you could have lost your shirt by buying the wrong stock.
Sears was a powerhouse. But it failed to adapt to the internet age. And it went out of business. Amazon made a bet on the right trend at the right time. It now has a market value of $1.1 trillion.
Today, the race is on again. Except this time, companies face a new make-or-break technology – AI.
If they fall behind in the race to adopt AI, they’re at risk of being left behind.
But for companies that move early to adapt, AI’s advantages could deliver windfall profits.
To begin thinking about the opportunities here, it’s worth looking at AI-linked stocks in two different groups.
One group is the beneficiaries of AI in the early stages. Their stock prices have quickly shot higher.
Training and deploying AI algorithms requires vast amounts of computational power. That’s why share prices of AI chipmaker Nvidia and AI server company Supermicro have soared this year.
These companies are providing the computing power, and building the networking infrastructure, to get AI off the ground.
Other early beneficiaries such as Microsoft, Google, and other software companies are adding AI into their apps and search engines.
This will make their products more valuable and boost their bottom lines.
Regards,
Nomi Prins
Editor, Inside Wall Street With Nomi Prins