How to Recognize Real Profit Potential in AI Stocks

Shah Gilani|June 30, 2023

Because artificial intelligence is such a hot topic now, more and more companies are claiming they’re onto it, will be using it, or are using it, because they want everyone to think it’s going to increase their revenues, profits, and stock prices.

Because behavioral finance works the way it does, that belief can create a self-fulfilling prophecy. As a result, traders and investors are clamoring for the next big AI stock rocket ride.

But here’s the thing: AI isn’t the be-all, end-all for most companies. Many firms aren’t going to be able to utilize it, and the majority of those that do adopt it will only get marginal benefit from it. That’s because they don’t have the data needed to make AI work, so they’ll have to buy AI bolt-on modules developed by other companies to help them find more customers, improve their services, or develop more targeted products.

The truth is, the real universe of AI stock-rockets is tiny right now.

But that isn’t going to stop corporate marketers from using it as a buzzword in their material, in earnings reports, and on scripts given to executives for their earnings calls with analysts. It’s being used to infuse a sense of optimism and a feeling of open-ended possibility into forward guidance.

So you have to be careful out there. Not everyone who claims to be into AI really is, and if you buy in to every company that’s talking about it, you’re going to lose your shirt when the reality check bounces.

Here, then, is how to separate the wheat from the chaff: what’s real and what’s fake when it comes to AI, how to tell the difference, and where the surest bets are right now.

How the Mention of AI Sent This Company’s Stock Skyward

Like I said, we’re seeing AI pop up on earnings calls all over the place. And there’s a simple reason why: it’s sickening, but effective.

In Nvidia’s case, for example, it was very, very effective.

Nvidia (NVDA) stock closed on Wednesday May 24, 2023, at $305.38. It had fallen 69% from November 2021 to mid-October 2022, when it started to recover and picked up steam with AI talk in 2023. That May afternoon the stock was up 109% in 2023.

Then Nvidia announced earnings.

While they were good, with revenue expected to come in at $6.52 billion for the quarter but showing $7.19 billion, and EPS coming in at $1.09 on an adjusted basis vs. the $0.92 analysts expected, it was their earnings call that afternoon that propelled the stock higher in aftermarket trading.

AI was mentioned more than 100 times in the earnings call, mostly by management touting the company’s AI preferred chips and waxing rhapsodically about demand. One analyst played along brilliantly on the AI narrative remarking, it’s “a war out there, and Nvidia is the only arms dealer.”

Nvidia’s equity capitalization went from $755 billion that Wednesday at the close to more than $1 trillion. That’s the power of the AI narrative that everyone’s tuned in to and what it can do for a stock.

But there’s another element to consider here.

How to Know Who’s the Real Deal in AI

It just so happens Nvidia wasn’t BSing on that earnings call. They make chips that are in high demand when it comes to building AI models and machines.

Microsoft is the real deal too. Not just because the company invested $13 billion in OpenAI and incorporated ChatGPT into its Bing search engine, or into Office suite products, moreover because Microsoft has incredible amounts of data to make AI work and will make using its cloud, Azure, the go-to cloud for AI interactivity.

The same thing’s true for Amazon, Apple, Meta, Google, and Tesla. They all have insane amounts of data that’s needed to drive AI, especially on an ongoing basis which is critical to AI continuing to learn. And they have products and services that’ll benefit from AI, that customers will clamor for.

The problem with AI, when it comes to all the other companies professing to use it already or supposedly working on AI and ML (machine learning, a subset of AI) strategies is there are a lot of “fake outs,” or AI-driven confabulations, in the mix.

Maybe you caught the falsified photo of an explosion near the Pentagon on May 22, 2023, that went viral because it was pushed out on a verified Twitter account attributable to Bloomberg. It went viral so quickly it caused the stock market to fall a quarter of a percent in minutes until it was recognized for what it was.

So-called “deepfakes” are also going to proliferate – videos of CEOs or other corporate executives issuing false updates on anything from earnings to AI breakthroughs, made possible by AI. Why? Because people will try and make money off them if they move stocks.

When it comes to companies, we’re already seeing “.ai” attached to names to draw interest in the stock on account of the extreme optimism attached to anything that looks like it’s got anything to do with AI. Some Internet addresses using that domain suffix are going for six digits now.

That reminds me of the how companies attached “.com” to their names to attract attention and interest in their stocks in the early dot com era. Or more recently how, in the crypto-blockchain craze, a Long Island, NY iced tea maker changed its name to Long Island Blockchain and saw its stock soar 200%.

Of course, that was a short-selling windfall for anyone who figured out they were still just making iced tea and lemonade.

There are going to be tons of fake outs and deep-fakes and companies touting their AI potential which will be a windfall for traders smart enough to separate the wheat from the chaff and short these pretenders as they’re called out.

And, believe me, I’ll be calling them out. For right now, I can give you a couple of general rules.

For the most part, the real-deal AI Powerball winners are going to be the so-called Magnificent Seven: Nvidia Corp. (NVDA), Microsoft Corp. (MSFT), Amazon.com Inc. (AMZN), Apple Inc. (APPL), Alphabet Inc. (GOOGL), Meta Platforms Inc. (META), and Tesla Inc. (TSLA).

Smart investors, if they don’t already own these AI juggernauts, will buy them on dips. They will dip, and we’re now in a bull market where it’s time to buy leadership stocks, and add to your positions in the them, on dips. In case you missed my video from yesterday, you should check it out – it has key levels you should look for to get in on all of them.

The second general rule is this: your investments in AI must focus on providers, rather than clients. What I mean by that is, if Company A can only use AI by becoming a client to Company B that provides the data, storage, models, algorithms, or other components of AI use, then for Company A, it’s an expenditure rather than an asset, and therefore is more likely to have a negative impact on earnings.

This includes almost any company that provides a service and is currently advertising that they’re going to enhance that service with AI. From productivity software, to personal shoppers at retail sites, to chatbot assistants… all of them are paying someone for the tech and data they’re using.

So keep a sharp eye out, and watch this space to make sure you always know who’s on the up-and-up regarding AI.

There’s no doubt that AI is going to become a part of the fabric of everyday life. Investing and trading is no different – in fact, around 70% of institutional traders on Wall Street already use it to help them make decisions and rake in huge gains. Unfortunately, to get access to those tools, you need a million dollars or access to funds like Blackrock.

Until now, that is. I have a colleague, an expert in pattern trading, who’s been working on a way to bring the same AI tools that Wall Street uses to everyday investors like you. And he’s ready to show you the results.

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