April 3, 2024

Artificial Intelligence

As of the end of March 2024, Nvidia (NVDA) has added over $1 Trillion in equity market capitalization this year alone! To put that into perspective, there are only 5 publicly traded companies in the world with market caps over $1 Trillion. Why? Artificial Intelligence.

NVIDIA plays a pivotal role in AI through its development of powerful GPUs (Graphics Processing Units), particularly the CUDA platform, which accelerates AI computations. NVIDIA’s hardware and software innovations enable the training and deployment of AI models across various sectors, driving advancements in fields like autonomous vehicles, healthcare, and data science. Nvidia has become the poster child for Artificial Intelligence.

Artificial intelligence (AI) is the simulation of human intelligence processes by machines, primarily computer systems. It encompasses tasks like learning, reasoning, and problem-solving. AI is reshaping the world by revolutionizing industries through automation, improving healthcare with predictive analytics, enhancing cybersecurity, and transforming transportation with autonomous vehicles, among numerous other applications.

For the growth investors that have owned Nvidia, Congrats. For the more conservative investor that did not own Nvidia, don’t worry. It is our belief that this transformational technology will ripple throughout many industries causing companies to become faster, more efficient and most important to investors, more profitable. Higher profits are the fuel for higher stock prices.

Some examples of companies using AI to become more efficient:

Amazon (NASDAQ: AMZN)

Utilizes AI algorithms extensively in its operations. One key example is its use of AI-powered recommendation systems, which analyze customer data to personalize product recommendations. This has significantly increased sales and customer satisfaction by suggesting relevant items based on past purchases and browsing history.

The Procter & Gamble Company (NYSE: PG)

P&G utilizes AI in various aspects of its operations, including supply chain management and marketing. For instance, P&G has employed AI-powered demand forecasting models to analyze consumer trends, sales data, and other relevant factors. These models can accurately predict future demand for their products, enabling P&G to optimize inventory levels, reduce stockouts, and minimize excess inventory.

John Deere, ( NYSE:DE)

John Deere utilizes AI is in precision agriculture. They have developed AI-driven solutions that analyze data from satellites, drones, and ground-based sensors to provide farmers with insights into crop health, soil conditions, and optimal planting times. By leveraging AI algorithms, farmers can make data-driven decisions to optimize irrigation, fertilization, and pesticide application, leading to increased crop yields and resource efficiency.

Amgen (NASDAQ: AMGN)

Amgen is a biotechnology company known for its focus on developing innovative medicines, is leveraging AI to enhance efficiency and innovation in various aspects of drug discovery and development. One notable example of how Amgen is utilizing AI is in the area of drug discovery and target identification.

Drug Discovery and Target Identification: Amgen employs AI algorithms to analyze vast amounts of biological and chemical data to identify potential drug targets and compounds with therapeutic potential. AI-based algorithms can sift through massive datasets much faster than traditional methods, identifying patterns and relationships that might not be apparent to human researchers.

JPMorgan Chase (NYSE:JPM)

JPMorgan Chase is one of the largest financial institutions globally, has been actively incorporating AI technologies to enhance efficiency, risk management, and profitability across various aspects of its operations.

Risk Management: AI plays a crucial role in JPMorgan’s risk management practices, helping to identify and mitigate potential risks across its business operations.

  • Credit Risk Assessment: JPMorgan uses AI algorithms to assess credit risk and predict the likelihood of default for borrowers. By analyzing financial data, credit histories, and other relevant factors, AI models can provide more accurate risk assessments, enabling JPMorgan to make informed lending decisions and manage its credit portfolio more effectively.
  • Fraud Detection: JPMorgan employs AI-based fraud detection systems to identify suspicious activities and prevent fraudulent transactions. These systems analyze transaction data in real-time, flagging potentially fraudulent behavior for further investigation and reducing the risk of financial losses due to fraud.

Although Artificial Intelligence(AI) is all the rage today, we believe that it is the real deal and has the power to transform the way companies will operate now and into the future. However, before we get consumed by the hype, it is important to reflect on the past. Early in my career and some 25 years ago, the craze was the explosion of the internet and how it was going to change the world, which it has. However, during the hype, many companies reached valuations that were extreme and ultimately made bad investments for the first 10+ years.

We may be seeing some extreme pricing now within some large-cap tech names. Fantastic companies, but may be a bit stretched in valuation. Using history as our guide, we can break down the group into three segments:

  • Infrastructure (Google, Nvidia, Meta, Amazon)
  • Digital Natives(Users of AI): (Adobe, Microsoft, Oracle)
  • Legacy Adopters: (JP Morgan, John Deere, Amgen, United Healthcare, Apple)

Many of you will notice that this last category is a sample representation of our Custom Core Portfolio. We want to own the companies that are adopting and using this technology to generate efficiencies to increase their profitability. We think this is where the long-term adoption of AI rewards investors the most.

This new Era will bring about many new and exciting investment opportunities. My best advice would be:

Be wary of runaway hype in a particular company. Be patient and nimble because there will be many opportunities as new companies emerge. Sell losers or companies that quickly become overvalued. Remain value oriented, companies with less hype already priced in will give you a longer investment runway. Lastly, remain diversified. This new technology will spread across all industries, not just tech!

It is our opinion that Artificial Intelligence is real and as investors you should participate. However, participating by investing in overpriced or over-hyped businesses has the potential to be very costly. Cisco Systems peaked in 1999 at $130 per share. It now trades at $49 some 25 years later. Investing in companies that will use the new technology to better their businesses stand to offer a better entry point and potentially more upside potential. I will close by saying, If this technology lives up to it’s hype, the stock market will begin to price in higher earnings from the efficiencies created by AI across multiple sectors and stock prices follow earnings.

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