Many investors are looking for the “next Nvidia (NVDA).” Who can blame them? It’s the ultimate artificial intelligence play. The stock is up 26,484% in the past 10 years.
But here’s the thing…
Few people were talking about Nvidia a couple of years ago. And for most of its existence, Nvidia underperformed the S&P 500.
Nvidia was in the right place at the right time. Almost by accident, its chips – originally designed for video game graphics – were perfect for what became the booming AI market.
In 2019, the company had revenue of $11.7 billion. For 2024, it’ll be about $61 billion. No one, not even executives at Nvidia, predicted that.
Unless you had similar luck, you missed the boat on its stock.
But there is a way to invest in the massive AI adoption cycle we know is coming without getting lucky or speculating on the “next Nvidia.”
Let me explain.
I Got Lucky
I was one of the rare exceptions that bought NVDA shares. My average cost was $14.03. But don’t be jealous.
First, I didn’t buy many shares. Even when the stock was cheap, nothing gave me great confidence in the company. No serious analysts expected it to become a $1 trillion company anytime soon, much less $3.3 trillion like today. Spending on AI globally was less than $100 billion annually when I picked up shares. And there was another problem.
I sold most shares way too early. That’s because I didn’t expect this incredible bull run. If we are honest, no one really did. That’s what happens with most speculative investments.
Sure, there are a few famous guys who held their Bitcoin from $100. But for every one that did, 100 others sold early. When it’s hard to tell what’s going on, the instinct is to take profits when they start adding up. And it’s almost impossible to resist.
To make sizeable investments and hold for the long term, you need conviction. And there is a way to hold proven companies with conviction that will benefit from the AI wave.
All Hail the Adopters
The Internet changed business in profound ways as adoption kicked in during the 2000s. Companies like Amazon (AMZN) would have been the Nvidias of that era. But then, like now, there was almost no indication that Amazon would become the company it is today.
Again, you’d have to have gotten lucky… and held on. That would have been very hard, especially after the crash.
But there was another category of company that benefited from the Internet. That would be established adopters. Take a company like Walmart. Twenty years ago, it was already an established business with a market capitalization of $125 billion.
And to Walmart’s great credit, it understood that online shopping (e-commerce) presented a major opportunity. It invested heavily in its digital architecture over the years. Last year, Walmart reported $648 billion in revenue. But you might be surprised to learn that approximately $82.1 billion was from e-commerce. This has also been a fast-growing segment for sales, roughly doubling from 2020.
The point I’m making is that Walmart was a great beneficiary of the Internet and online shopping. But it was also an already great business before that. In other words, it’s the type of stock an investor could hold with conviction for years… or decades.
No luck involved, not really.
So, who are the established AI adopters?
The Companies We’re Watching
Consider Deere (DE), better known as John Deere. You know it as a world leader in tractor manufacturing. But what you may not know is that it’s revolutionizing farming.
By combining advanced artificial intelligence, the most accurate GPS tech, and cutting-edge robotics, John Deere makes the world’s first fully autonomous tractors. All on their own, these machines can find the field, plan the best route once it gets there, plant seeds, and avoid obstacles along the way better than any human.
Source: Deere.com
Farmers can manage thousands of acres while on vacation in Europe for the first time in history, and with lower costs and higher crop yields than before. Not only are John Deere’s tractors commanding higher prices, but they are anticipating a double-digit percentage of revenue to come from software sales. That’s all because of its industry-leading merging with AI.
Note: I understand Brad recently sold shares of DE from The Wide Moat Letter model portfolio. But it’s not because it isn’t a great company. The original thesis had everything to do with automation. As Brad explained in his issue, he recommended selling to lock in great profits and look for a new entry if/when the valuation becomes attractive again.
John Deere is a standout in its industry, but it’s not alone. Starbucks (SBUX) uses “Deep Brew,” a custom AI program, to automate inventory management, predict maintenance needs, and even remotely operate espresso machines. That’s not to mention how it now embraces AI to create and perfect marketing and sales promotions. None of this is noticeable to customers, and that’s the point. It’s all happening behind the scenes to maximize profits. And unlike Deere, Starbucks is currently trading at attractive levels.
More Gains and Less Pain
Trying to pick the next Nvidia is nearly impossible. And even if you do, you won’t know it. So, you’ll only buy a small position. Then, you’ll sell way too soon. Understanding our own strengths and weaknesses is critical for long-term investing success. Fortunately, I know a lot more reliable – and profitable – ways to profit from AI.
John Deere and Starbucks are industry leaders using AI to supercharge their businesses. They have extremely skilled management teams, A+ credit ratings, and generate a ton of cash flow for investors. They are also leaders within their industries when it comes to AI.
By finding companies with this profile, it allows us to profit from the coming developments in AI without high risk. In fact, Starbucks and John Deere are among the highest-quality companies in the world. At Wide Moat Research, we are focused on discovering companies just like Starbucks and John Deere but in every sector. We strongly believe they will use AI to dominate their industries. And investors will reap the rewards.
A tiny allocation to a single speculative AI company isn’t the game changer we all secretly hope it will be.
But this approach allows you to responsibly invest real dollars in AI through rock-solid companies across many sectors. Diversification is vital, and that’s no different with AI. Our strategy allows you to responsibly invest a lot more money into AI. And unlike pouring money into the latest AI meme stock, there is no fear they’ll suddenly go to zero. That helps you hold on to winners while the profits build.
The downside is it takes a lot of work. Each sector’s major players and their AI strategies must be studied. Fortunately, that’s where we come in. Wide Moat Research is working hard on this as we speak. Paid-up subscribers to our research services can expect to hear more soon.
Regards,
Stephen Hester
Chief Analyst, Wide Moat Research