Editor’s Note: For today’s prediction series, we’ll sit down with Brad to discuss one of the biggest investment stories of the past year – artificial intelligence. As Brad puts it, AI will present new opportunities… and a number of challenges. Read on…
Van Bryan (VB): Brad, artificial intelligence (“AI”) has dominated investors’ imagination all year. But earlier this year, you released a presentation predicting an “AI Rupture.” Could you explain that thesis?
Brad Thomas (BT): The Rupture is the name I gave to the sudden, jarring changes that have happened – and will continue to happen – as a result of the adoption of artificial intelligence. And, yes, there have been some incredible success stories as a result of AI, but there’s also been some very disruptive events.
In a special report, I compared the adoption of AI to the Luddite Revolution of the early 19th century. Then, it was automated weaving machines that disrupted and really upended the societal fabric for these skilled English weavers, people who had built a life for themselves doing this work for generations.
Nowadays, a “Luddite” is generally a pejorative. It’s somebody who can’t accept new technology. But the point I was making is that, technically speaking, those original Luddites weren’t wrong. Automation made their labor obsolete. And that was incredibly disruptive for their lives, their livelihoods, and the value they placed on themselves as craftsmen.
Now, I’m not arguing that we should go back to hand-spun clothing. That’s ridiculous. I’m just making the point that the adoption of new technologies is not always frictionless. Sometimes, it means large-scale change that is very unsettling for many people.
And when I look at something like artificial intelligence, there are two things that stand out. The first thing is just how quickly it is progressing. Two years ago, generative AI – which would be models like ChatGPT and others – was mostly theoretical. But here we are, and it’s just exploded. Every company is developing an AI strategy. And something like half of Americans have already used this technology in one form or another.
The other thing I would point to is the potential for this technology to disrupt not just one industry, but almost every single industry. I don’t know if we, as a society, have fully grappled with the implications of that.
The next few years show a lot of promise for this technology, but it could also be really volatile as AI continues to gain traction.
VB: What are some specific examples of that?
BT: I’ll give you one that immediately comes to mind.
I’m sure most of us remember that dock workers strike from earlier this year. Basically, the union that represents dockworkers on the East and Gulf Coasts threatened to shut down America’s ports. That’s a problem.
The strike was ultimately short-lived, but there’s one lingering concern among the workers – automation. The union is insisting on no new automation or semi-automation. And if that doesn’t happen, we could be right back to a strike next year.
I was a speaker at the Stansberry Conference in Las Vegas earlier this year. And another presenter – who had previously worked at OpenAI – made an interesting point. He had spoken to these dock workers. And what he found is that it wasn’t that they thought they couldn’t get another job if they were laid off by automation. Because they probably could.
But in a real sense, their entire identity was connected to being a longshoreman. And the thought of losing that identity, that sense of purpose, was a hard thing.
Maybe that’s irrational. But human beings aren’t always rational. And so, when I speak about a “rupture,” that’s the type of thing I mean. It will be these sudden, drastic changes as a result of this technology that will take people by surprise.
At the same time, I don’t see this genie going back into the bottle. There’s simply too much capital and too many resources invested in this technology to turn it around. And the point of that special research report was to help subscribers understand and prepare for this new world.
[Paid-up members of The Wide Moat Letter can catch up on Brad’s special report right here. And if you’re not a member, you can learn more about joining right here.]
VB: Arguably the biggest beneficiary of AI adoption has been Nvidia (NVDA). The stock is up about 160% since January. But in November, you advised readers to steer clear. Can you explain why?
BT: Nvidia is an incredible business. It’s probably one of the greatest businesses the world has ever seen. Just to give you an idea, in the third quarter of 2023, Nvidia reported revenue – that would be top of the income statement – of $18.1 billion. But flash forward one year, and the company reported earnings of $19.3 billion. In other words, in one year, Nvidia’s profits have surpassed its revenue.
That is simply astounding. I’ve never seen anything like it. It’s now a $3 trillion company with gross margins north of 70%. Nvidia doesn’t have a quality problem, it has a valuation problem.
The point I made when I recommended steering clear of Nvidia is that everybody already knows how great a company it is. The hopes and dreams of countless investors are already reflected in its multiples. And even though it has a dominant market share, the semiconductors industry is ruthless. Somebody is going to find a way to eat away at Nvidia’s market share. That’s my prediction anyway.
Maybe I’ll be wrong. That’s always a possibility. But I’m always looking for a meaningful margin of safety when recommending something to readers. Nvidia is a great business, but it just doesn’t strike me as great value, at least right now. If that ever changes, we’d be the first to buy.
VB: If not the obvious names like Nvidia, what are other ways investors could gain exposure to artificial intelligence?
BT: I’d like to give credit where it’s due. One of our team members, Stephen Hester – who publishes two of our premium services – has an interesting thesis around “established adopters.”
The point Stephen is making is that, if most people were honest, they really didn’t expect the rapid rise of Nvidia. Heck, even management was surprised. In order to have made a four-digit return with Nvidia, you really had to be lucky… and hold on. That’s very difficult to do.
But there’s another class of company, the type that is a beneficiary of AI adoption while already being an established business. In other words, its core business is sturdy enough that an investor could hold the stock with conviction for years. And you simply let the firm adopt AI into its business.
Stephen listed companies like John Deere, which is investing heavily in automated agriculture equipment. Or Starbucks, which is using AI to streamline operations and create new marketing campaigns. These are already great companies, and they’re investing heavily in AI for future growth.
So, that’s one idea, which I like.
[Catch up on Stephen Hester’s “Established Adopters” AI thesis right here.]
VB: What strategies have you used in The Wide Moat Letter?
BT: For newer readers that might not know, The Wide Moat Letter is our entry-level service that finds “wide moat” businesses that can pay dividends, compound, and deliver great returns over time. And we’ve done a few things with our model portfolio.
First, we do own technology stocks with a direct connection to artificial intelligence. Broadcom (AVGO) would be an example of that. We recommended it in the depths of the COVID crash when it was an unbelievable value. And we’ve held it ever since. We’re recording about 1,141.2% return.
And what’s amazing is that one of the biggest drivers of growth was the company’s AI segment. But that business line didn’t even exist when we first bought it. But we’re happy to hold on.
Another interesting example would be something like WEC Energy (WEC), a utility company for the Midwest that we recommended in June. And believe it or not, this was actually an AI-related stock.
That’s because of the enormous demand from data centers for more and more electricity. I would never use the phrase a “sure thing.” But expecting more power demand from data centers is probably the closest we’ll get.
And for reasons we explained in the issue, the midwest is turning into a new hub for these large AI data centers. That stock is up about 17% since, or 10% annualized. That’s pretty good for a humble utilities company.
Along similar lines, we’ve also owned Digital Realty Trust (DLR) for the last two years. This is one of my favorite real estate investment trusts (“REITs”) that we own in the portfolio. You can think of Digital Realty as a “data-center landlord.” And it now boasts more than 300 data centers in its portfolio. The stock is up close to 100% since we recommended it.
Another area I’m looking at in the REIT space is companies that can streamline operations using this technology. A company like Realty Income, which I mentioned last time, has more than 15,000 leases worldwide. That’s a lot of data an AI model could “mine” and find new value in other markets or with other properties.
I think the point I would make about investing around artificial intelligence is that there are a lot of interesting opportunities that don’t include the obvious names like Nvidia.
Yes, it’s been an incredible run for the stock. But for all the reasons we just talked about, I think there are better opportunities with more attractive margins of safety. Based on all the data I’m seeing, this is going to be a multiyear trend with second- and third-order effects that very few are thinking about. And there will be plenty of interesting investments around those areas.
VB: Thanks very much, Brad.
BT: Anytime.