How to play the hot AI sector for 2023
2023 is shaping up to be a global economic train wreck, but we intrepid hot stock sleuths are salivating over what is looking like the hot sector for 2023: Artificial Intelligence.
During any economic recession/bear market, there is always some outlier segment of industry that chooses the worst markets to make their biggest moves. It was cannabis in 2014 that shook the Canadian small cap sector out of its slumber, and lithium in 2012. This year it’s AI, but there are remarkably few ways to play it.
First, it is important to understand what AI is and what it is not.
Artificial Intelligence is essentially where a pod of computing power is programmed with algorithms that enable Machine Learning, where the computing pod autonomously adjusts its algorithmic configuration to improve its outcomes with human Quality Assurance prompting it.
It is not, at this point, a misanthropic independent life form that continuously evolves toward a “what do we even need humans for” sociopathy. Nor can it autonomously learn (as far as is disclosed publicly) without continuous human instruction to make it useful.
There are a few publicly traded companies with an AI-esque flavour to them, but their business models are not necessarily going to attract a massive sticky public user base like ChatGPT did in its first weeks on the market. But that doesn’t mean they are not going to be major players potentially in the new economy that AI is going to enable.
1. Chat GPT/OpenAI LLC
ChatGPT is owned by OpenAI LLC, itself a privately held entity controlled by a small group of billionaires, including Elon Musk and Microsoft. So you know this is going to be a club deal, and with Musk’s involvement, fraught with egomaniacal risk. There is no way to invest in OpenAI.
AI companies, at this point, can to be divided into three different categories:
- Immediate impact/high user base applications such as ChatGPT;
- Spatial Web 3.0 infrastructure companies, who are capturing the data processing power of AI and programming it into economic functionality;
- Companies that disrupt an entire industry segment using AI applications like ChatGPT.
OpenAI, the owner of ChatGPT, is not publicly traded, and the current ownership structure indicates that there is no controlling position above 10 percent of the issued and outstanding equity. When it does head for IPO, it will be one of those incredibly exclusive deals that you won’t be able to get a piece of unless you’re above 8 figures at Morgan Stanley or Goldman Sachs.
But what about direct competitors to ChatGPT? There are increasing numbers of these, though they are all based on Transformer, so one would argue that Google is the most likely candidate, both in terms of depth of technology and financial resources. And as we featured yesterday in the article about going short Google, the valuation of Google may soon be a relative bargain – especially if the massive short positions against Google continue to pile up as the thesis in that article plays out.
If ChatGPT continues to undermine Google’s search traffic, which it has no doubt down to a certain extent as early adopters plumb the depths of ChatGPT’s capabilities, Google may be forced to either a) launch its own chatbot prematurely and damn the lost ad revenue in the interest of market share, or b) orchestrate a takeover of OpenAI that would tuck it under Google’s wing.
Probably one of the best AI opportunities is C3.AI, Inc.Founded by Silicone Valley veteran Tom Siebel (who sold Siebel Systems to Oracle in 2006 for US$5.85 billion), C3.AI essentially provides an outsourced AI consulting and implementation enterprise to existing enterprises seeking to harness the power of AI to make their vast perpetually accumulating troves of data useful.
With customers like Shell, Baker Hughes, Raytheon and the US Air Force, this company is poised to be another acquisition target by big tech. The company earned US$62.4 million in top line revenue in the quarter ending October 21, 2022 with a gross profit of #41.7 million, while spending over $50 million in the same timeframe on R&D. With a current market cap of US$1.2 billion, this is my top pick for investors seeking exposure to AI for portfolios with a “value with a reasonable degree of risk” approach.
Startups? What startups?
As far as younger companies emerging in the space that might provide early exposure to the massive opportunity inherent in the second category of AI companies, I am presently only aware of one which I have been following with one eye since they went public, and that is Verses Technologies Inc, (OTCMKTS:VERS) (NEO:VERS) which describes itself as “a cognitive computing company specializing in next generation AI and developer of the world’s first network operating system for enabling distributed intelligence”.
The company has a product called Wayfinder that uses AI to enhance the speed and efficiency of warehouse operations in fulfillment logistics. The company earned US$278,000 in the last quarter ending September 30, 2022 while expending ~US$4.7 million.
But apart from these, an AI-generated list of “top 10 startups in AI” spits out a list of companies that are anything but startups:
1. NVIDIA (NASDAQ:NVDA)
2. IBM (NYSE:IBM)
3. Micron Technology (NASDAQ:MU)
4. Amazon (NASDAQ:AMZN)
5. C3.ai (NYSE:AI)
6. Microsoft (NASDAQ:MSFT)
7. Alphabet (NASDAQ: GOOGL)
8. Apple (NASDAQ:AAPL)
9. Intel (NASDAQ:INTC)
10. Tencent (OTC:TCEHY)
But the list is intriguing because it reveals a fundamental reality about AI that could ultimately determine who the winners are in the space.
That reality is the fact that anything incorporating a proprietary AI data set and language model is going to require an extreme level of computing power and advanced technological know-how. Which by definition places it outside of the reach of any start-up.
Companies that utilize AI to effect a paradigm shift within a market are the most likely early stage opportunities yet to appear on the publicly traded stage, but we will be tracking them as they arrive.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
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