Microsoft’s early bet on AI is paying off…
Shares popped 4% yesterday.
This came after the company reported that its cloud services sales shot up 29% in the first quarter. That’s even more than the 26% growth rate in the fourth quarter.
And a big driver of that growth was artificial intelligence (“AI”).
To fill you in real quick… Microsoft was an early investor in OpenAI, the company behind AI chatbot ChatGPT. It invested $1 billion in OpenAI in 2019. Since then, it has invested more than $13 billion.
In return, the tech giant got to integrate ChatGPT into its software services.
It began with Bing, Microsoft’s search engine. Now, its Office apps – which most customers access through the cloud – are getting an AI upgrade.
This AI, called Copilot, will respond to your emails… summarize your meetings… and even help you create PowerPoint presentations.
And this is not just lighting a fire under Microsoft’s share price. It shows that we’ve begun the second phase of the AI profit cycle.
That means a new set of opportunities to invest in the AI boom.
Hardware, software, everywhere…
Our tech investing expert, Colin Tedards, has a knack for distilling complicated investing topics. That’s how he came to our attention here at Legacy Research.
He blew up on YouTube due to his jargon-free breakdowns of the world’s most profitable tech stocks.
His channel has more than 127,000 subscribers. And more than 10 million people have seen his videos.
That puts him in the top 1% of all YouTube channels.
And Colin has done a great job breaking down the AI megatrend and showing folks here at Legacy how to invest.
As he’s been hammering on, there are three distinct phases of the boom – hardware, software, everywhere.
First, we build the physical infrastructure that makes AI possible…
Think of the high-performance AI chips Nvidia’s makes… the high-speed networking kits that allow these chips to work together… the solid-state storage drives to house data sets for training… the servers to shunt data back and forth… even the cooling systems for the data centers.
Without these components in place, we can’t use ChatGPT and other AI systems at scale.
The next phase is AI-enhanced software. That’s where we are now.
Microsoft, Google, Amazon, and Meta aren’t spending hundreds of billions of dollars building out this infrastructure for the fun of it.
Once it’s in place, they’ll integrate AI capabilities into their software.
Copilot is just one example.
Google is doing the same for its suite of enterprise software tools called Google Workspace. This includes Google Docs, Google Sheets, and Gmail.
These will all get AI upgrades so that you can do things like generate an entire document or create images based on a prompt.
And Meta is introducing Meta AI. It’s the company’s answer to ChatGPT. It will be available on WhatsApp, Facebook Messenger, and Instagram. It’s also coming to Meta’s Ray-Ban smart glasses.
Meta AI can give you real-time information and generate photorealistic images from your text prompts in seconds to share with friends.
It’s also launched 28 more AIs with unique personalities. Snoop Dogg, Tom Brady, Kendall Jenner, and other celebrities voice some of these.
That’s why Colin has been focusing so much lately on AI software companies…
The big benefactor of the hardware phase of the boom has been Nvidia.
It’s up 176% this year alone. But as Colin has been warning, that’s left it “priced for perfection.”
That means if there’s any small slip in revenue or profit growth… investors are going to punish the stock – hard.
But we’re just at the start of the software phase. Over to Colin for more on that…
Microsoft is a leader in monetizing AI. If its rollout of Copilot is as successful as I expect, other tech companies will be racing to do the same.
This will drive revenue growth higher for companies that do it right. That means we’ll continue to see investment and development into AI.
We’re only just starting to see how AI will pay off. Over the months and years ahead, we’ll see entirely new ways for tech companies to use AI in ways that provide value to people and enterprises.
First, the internet revolutionized software companies and allowed them to sell their services to billions of online customers. Now, AI is making those services more valuable in ways that we haven’t even started to fully understand.
And that’s not the end of the adoption cycle. Next, is the “everywhere” phase.
Eventually, AI will be woven into the fabric of our daily lives…
Today, every company in the world… and roughly 65% of the global population… uses the internet in one form or another.
The same thing will happen with AI. Except the changes we’ll see as a result will be even more profound.
And it won’t just be tech stocks that benefit.
Already, Bank of America and JPMorgan Chase are using AI to help prevent financial fraud.
AI systems can analyze large amounts of data to identify unusual patterns of activity that usually mean a fraudster is at work.
For example, an AI system can identify a customer who is suddenly making many transactions in unusual locations.
AIs can also detect forged or fraudulent documents, such as checks, credit cards, and passports.
Additionally, Visa and Mastercard are using AI to detect fraudulent payments. These AIs use decades’ worth of shopping behavior to help spot fraudsters running up bills on other people’s cards.
Many other industries are testing out the power of AI in their work, too…
Shell, the global energy producer, is using AI to predict maintenance requirements on rigs and drills before issues arise. That cuts downtime and avoids the need for expensive repairs down the line when components fail.
AI could even lead to better crop yields. Archer-Daniels-Midland is a major agricultural company. It’s using AI to better forecast weather conditions.
And Deere & Company – best known for its John Deere tractors – is using AI to develop autonomous tractors and farm equipment.
Ultimately, this will lead to higher crop yields, lower overhead costs for farmers, and cheaper prices at the grocery store.
If you’re already a subscriber to Colin’s work, you know how to play it…
He’s recommended two AI hardware plays at his flagship tech investing advisory, The Near Future Report.
He’s also recommended four AI software plays and one AI everywhere play.
And he and his team are busy researching best-in-breed AI stocks to help paid-up subscribers maximize their profits in the boom ahead.
We’ll let Colin wrap it up…
AI isn’t a fad. It’s a multi-decade profit trend. Companies are accelerating spending on AI hardware to usher in a new era of AI-powered software… everywhere in society.
Moments like these truly don’t come along all that often. Investors who position themselves in these stocks and hold for the long term are set to experience the next wave of gains.
But to do that, you must ignore the day-to-day market noise and focus on the long-term profit trend instead.
Could stocks head lower in the short term? Absolutely. Given how much tech stocks have outperformed this year, it’s only natural for investors to take profits. But that will give us lower entry prices for AI and other tech plays on our watchlist.
There are some interesting exchange-traded funds (“ETFs”) that give you exposure to this trend.
One that caught my eye is the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO). It holds 114 leading AI and robotics stocks. And it charges an annual fee of 0.47%.
But keep in mind that this is a broad play on the sector. IRBO will give you exposure to the best AI companies… and some duds.
For more specific ideas on how to play the boom ahead, make sure to follow Colin over at our Bleeding Edge e-letter. It’s where he shares his latest ideas and insights about the biggest trends in tech.
You can find the latest from him and sign up for free here.
One last thing before I go…
After five years at the helm of The Daily Cut, I’m moving on to a new role at Legacy Research.
That means some exciting changes are coming up next week when your new editor takes over.
But rest assured… They’ll be continuing the mission of this e-letter by sharing the best money-making ideas from the Legacy team to help you really move the needle on your wealth.
Stay tuned…
Regards,
Chris Lowe
Editor, The Daily Cut