Kris’ note: One investment trend has dominated headlines this year: AI. The rise of ChatGPT in November 2022 led to a surge in interest in artificial intelligence.
As we’ve explored throughout the year, generative AI technology offers considerable opportunities for improving society. This week, we’ll share some of our top stories on the applications of artificial intelligence – as well as the investment trends in the AI space that still look appealing.
To kick things off, we’ll start with an essay from Legacy Research tech guru Colin Tedards.
In this essay from September 14, Colin details the rise of Nvidia, the star of the AI boom – and why investors might want to look for smaller companies following Nvidia’s massive rally.
On April 5, 1993, history was made.
That’s when three electrical engineers – Jensen Huang, Chris Malachowsky, and Curtis Priem – founded a company that would change the course of high technology forever.
That company was chipmaker Nvidia (NVDA).
It’s all over the news these days because it’s now the No. 1 maker of advanced chips for ChatGPT and other artificial intelligence (“AI”) systems.
And its shares are up 211% so far this year as excitement builds on Wall Street over what these systems are capable of.
But as I’ve been pounding the table on, if you want to maximize your profits from the AI boom that lies ahead, there’s a better way to do it than by buying Nvidia shares.
While mainstream investors are chasing Nvidia higher, there are dozens of tiny, undiscovered AI stocks that could deliver profits of 1,000% and higher.
I’ll show you how to get access to that information shortly. First, let’s look at how Nvidia became one of the world’s most important tech hardware companies…
An Envy-Making Company
The founding trio’s mission was to build computer chips their rivals would envy due to their capabilities and performance.
That’s why they called their company Nvidia. It’s a play on the Latin word for envy – invidia.
Specifically, they focused on creating chips that would bring high-quality graphics to the video game market, which was taking off.
At the time, the Super Nintendo Entertainment System (SNES) and the Sega Genesis were the most popular consoles. And their graphical capabilities were limited.
You may remember these games. Characters made their way through a 2D graphics world, moving through levels from left to right. They couldn’t render the kind of immersive environments possible today.
Screenshot of the first Sonic the Hedgehog game on the Sega Genesis
(Source: Sega)
To bring these rich environments to life, a new kind of chip was needed.
The answer came in 1999 with Nvidia’s release of the GeForce 256.
This Graphics Processing Unit (“GPU”) is ideal for handling the computational demand needed to display complex, immersive graphical worlds.
The latest Sonic the Hedgehog game features an immersive graphical world
(Source: thegamingoutsider.com)
And since then, Nvidia’s GPUs have been a top choice for rendering advanced video game graphics.
Then in 2012, something huge happened that would change Nvidia’s business for good… and propel it into the ranks of the world’s largest tech firms.
Two computer scientists, Alex Krizhevsky and Ilya Sutskever, discovered that Nvidia’s GPUs were perfect for a kind of AI called deep learning.
This is where you teach a computer to learn from experience. And it’s the breakthrough that eventually led to ChatGPT and other AI chatbots.
And Nvidia recognized the importance of this breakthrough.
During his keynote speech at Nvidia’s GPU Technology Conference in 2018, Huang made that clear. He told the packed audience at the San Jose McEnery Convention Center in San Jose, California, “We risked everything to pursue deep learning.”
And that risk paid off… big time.
Today, Nvidia is known as the undisputed king of AI hardware.
On June 16, this helped the company pass the trillion-dollar valuation mark. Nvidia remains one of the greatest success stories in high technology and investing.
And therein lies the problem for us as investors…
Nvidia’s Rapid Growth Is Over
At a $1 trillion valuation, Nvidia’s best days of growth are behind it.
That’s just basic math…
A “mega-cap” $1 trillion company must add $10 billion in market value to move its stock 1% higher. By contrast, a “small-cap” stock worth $1 billion has to add just $10 million in market value to have the same effect.
Another problem is that Nvidia is priced for perfection. Its shares trade for a price-to-sales ratio of 34. That means you pay $34 as a shareholder for every dollar of sales the company has.
Investors only have to pay about $8 for every dollar of sales for its nearest rival, Advanced Micro Devices (AMD). That’s a 4x markup for Nvidia over its closest rival.
I’m not saying Nvidia’s shares won’t go higher from here. That’s perfectly possible. But the days of rapid triple-digit returns have come and gone.
But just because we’re not investing in Nvidia does not mean we can’t profit from its success. It all comes down to something I call “The Nvidia Effect.”
Here’s what I mean…
When a company becomes as large as Nvidia, every move it makes impacts the smaller companies that support its operations.
And it’s these smaller companies leveraged to Nvidia that will see the largest returns in the months and years ahead.
And you don’t have to take my word for that. We’ve seen this play out before…
1,211% Gain From This Tiny Tech Stock
On January 26, 2021, Tesla set a new all-time high of $294.
It marked a 1,390% gain over the previous two years. It was also enough to make Elon Musk the world’s richest man with an estimated net worth of $195 billion.
Tesla was a stock market sensation. It was the stock that embodied the electric vehicle (“EV”) revolution. But investors who were late to recognize the EV trend were left with a tough decision.
They could buy shares of Tesla at a high valuation or sit on the sidelines. Today, Tesla trades at about $272. That means investors were right to be cautious about buying in at such a high price.
But there was a third option. And it gave investors a second chance at Tesla-like gains.
On July 16, 2021 – six months after Tesla’s new peak – a tiny semiconductor testing company called AEHR Test Systems announced on its earnings call that it had landed a “major Fortune 500” customer.
AEHR’s boss mentioned Tesla 11 times on the call.
This caused its shares to jump 22% from $2.81 to $3.43 overnight.
And that was only the start.
Securing Tesla as a partner also put AEHR on the map. This attracted more clients and institutional investors.
This helped AEHR triple its sales from $16 million in 2021 to $50 million in 2022. And it grew from a market value of $60 million to $1.3 billion over that time. Its shares delivered a 10x return.
If you’d invested in AEHR within a month after it announced its partnership with Tesla, you’d have had the chance to make a gain as high as 1,211%.
That’s enough to turn a $10,000 investment into $131,100.
If you’d bought Tesla shares during that same time, you’d be down 7%.
This is a perfect example of the opportunity we have in front of us today with the AI boom.
Let the “Nvidia Effect” Make You Rich
Nvidia is a great company. It is the undisputed king of AI hardware. But it is not my favorite way to play the AI megatrend.
Instead, our strategy is to target the smaller, lesser-known suppliers that make Nvidia’s dominance possible.
This opportunity is so massive… and so urgent… I’ve put together a strategy session all about it.
I’ll show you the full potential and how you can profit from it in your portfolio.
To find out more about this story, go here.
Regards,
Colin Tedards
Editor, The Bleeding Edge