AI stocks to buy if you want to play the AI 'supercycle': Strategist

As chipmaker Nvidia soars above a $1 trillion market value, investors are searching for the next big tech name that could see the same AI boost. Portfolio Manager of the American Ingenuity Fund Adam Johnson details several tech stocks that could follow Nvidia's lead and capitalize on artificial intelligence trends.

Video Transcript

- The AI boom is sparking a massive rally in tech. Nvidia has been one of the clear winners this year. Shares surging more than 160% since the start of the year. Up 25% in just the last five days. Well, earlier this week, Nvidia reached a major milestone, briefly joining the $1 trillion valuation club.

Well, here with more on how to play the AI hype, we want to bring in Adam Johnson, portfolio manager of the Bullseye American Ingenuity Fund. Adam, it's great to see you here. So before we get into those specific plays, as a portfolio manager, how are you looking at this hype in AI? Is it warranted?

ADAM JOHNSON: Did you say the hype in AI because I think it's actually the reality of AI. And if you listen to what management said earlier this week, it's actually a 10-year cycle. And I'm even going to go so far as to call it a super cycle. Let me put it to you this way, Seana. Every computer that's out there, including this guy right here, the iPhone, it's basically too slow.

It's not powerful enough because I think what's going to happen is that artificial intelligence is going to become so synonymous with the way we operate, the way we think about the world around us, that what we're going to find is that we need more powerful chips. We're going to need new computers. That creates a replacement cycle that isn't just about the hype today and where's the stock going over the next week or two, but it's actually about sustained demand.

It's why the company guided up and said, we're going to have $11 billion of revenue this quarter. And to put that in perspective, back in 2020, they had $11 billion in revenues for the whole year. So in just two years, they've effectively quadrupled the amount of money that's coming in the door. And I think that's just the beginning. So, no, I don't think it's hype. I think it's actually the beginning of a super cycle.

- So Adam, Diane here, who else are the winners here? Obviously, Nvidia has this clear lead. They joined the trillion dollar club this week. Who else are the clear winners in this AI-- especially the generative AI space?

ADAM JOHNSON: Yeah. Well, Diane, they're not many. And that's in part why these names are running as hard as they are. I call it scarcity value. Obviously, you've got Nvidia. And the reason that Nvidia is the play is that their chips are so fast, so much more powerful than the competition. The Nvidia chip is capable of 30 trillion calculations per second. That's like a million 1 millions 30 times. It's kind of hard to fathom.

No other chip maker can come even close. That's why Nvidia is the proxy for artificial intelligence. But to your question, some of the software providers, there's, which was founded by Tom Siebel. You may remember Siebel Systems back in the '90s. That's a company that actually helps companies design artificial intelligence gathering and predictive systems that will look at an entire network.

You're Delta Airlines and you want to try to figure out how to optimize passengers, flights, crew, everything else, you put it into an AI-based program, and it starts to look at the world differently and a lot more capably than we can at 30 trillion calculations per second. So is one. Another that's been getting a lot of attention, although it's kind of funny because it's been so hated, is Palantir. By the way, the ticker on the first one is AI. Palantir is PLTR.

Palantir was founded by Peter Thiel, maybe the most hated man in Silicon Valley. Public enemy number one. He's very conservative. So he doesn't jibe with the whole ethos out in Silicon Valley. The government is Palantir's biggest customer at about 55% of revenues. And the other thing that Palantir does, which isn't great from my perspective as an analyst and a stock picker, is that while they're very good at pitching themselves to companies and winning the business, they go in with their team of AI scientists, they work for nine months, and then they leave.

So they worked so hard to get the customer, they make money for nine months, and then they leave. And they don't really get that much in terms of subscriptions on the back end. So those are the reasons why Palantir hasn't taken-- it hasn't gotten the vote from Wall Street that some of these other companies have. That said, Palantir was at 7 bucks for months and months. It's now up to 14 or 15 in like a week. So yeah. There's a gold rush for these handful of names. They're not many of them.

- Adam, what about the larger tech names? Obviously, Microsoft and Google really the focal point when it comes to Bard really, but Microsoft when it comes to ChatGPT. How much investment, I guess, interest do you have in those two names given the fact that they are obviously far from those more pure plays that you were just talking about?

ADAM JOHNSON: Well, I'm long them all because they're wonderful companies. But to your question, Seana, no, they're not pure plays. They're not anywhere close. I mean, yes, Google is developing some in-house artificial intelligence. I mean, of course. They'd be crazy not to, just as Microsoft has backed OpenAI, the company that created ChatGPT. But remember, I mean, even ChatGPT, which everybody's talking about, isn't making any kind of money to speak of at all. I mean, they gave the thing away for free last November.

And now they're talking about business models where you can, what, pay $20 a month or something? That doesn't accomplish a whole lot. And when you're talking about a company with tens of billions in revenue, the notion that Microsoft is an AI company is-- I think it's wishful. But no. I'm long Google for search. I'm long Microsoft because it has effectively become the backbone of the cloud, computing in the cloud.

And, yes, each of them has an AI practice. Each of them has an evolving AI approach. Frankly, so does Amazon, as you might expect, which is how they figure out how to sell this stuff. But if you want pure AI, I'm telling you, it's really hard to do. You've got ticker AI, which is [INAUDIBLE]. You've got Palantir, run by the most hated man in Silicon Valley. And you got Nvidia, which makes chips, which powers AI, but it isn't AI per se. Again, it's a really small universe. And that's why all these companies are up so much. Everyone's jamming into these names and pushing them up.

- And I wonder if some of that's-- a little bit of that is FOMO. And you mentioned, OpenAI. in particular, that stock taking a hit today amid some questions about its accounting. But it has AI in its name. What do you think that we can expect to see with regard to companies trying to get in the space or pivot even how they brand themselves? We saw that before with Facebook becoming with Meta. Do you expect to see some of that in this space? And is that even a good idea?

ADAM JOHNSON: Yeah. We've kind of seen this movie before. And it's funny how it seems to repeat about every 10 years. I mean, you mentioned Facebook that decided it was going to pivot to a Meta and the metaverse. That didn't work out quite as planned, though I am long it. I bought it in the hole. And so far, so good. Square I've actually been buying. And that rebranded as Block in order to capitalize on the blockchain. But admittedly, that stock is down 60%, 70%.

If you remember back in the 2000's, everyone wanted to be a dot-com. If you had, that was the poster child. So that's why I say we've sort of seen this movie before where something comes along and everyone says, oh, yeah, we should do that. I mean, look at the SPAC boom. Two to three years ago, everyone said, oh, wow, if we really want to hit it big, we should create a SPAC.

So there is that element to artificial intelligence, except that you actually have to come up with goods. You can't just create a website and say we're going to sell X, Y, and Z, and we're going to call ourselves You actually have to have the computing power. You have to have the software. And I think that sets a much higher bar for this artificial intelligence build out. And the other thing-- this is going to take many years. So there are going to be some winners and losers. You're not going to be able to see very many companies IPO yet because that window hasn't opened.

It's been very tough on Wall Street. You report on layoffs. I mean, Goldman is laying off more as of today, right. So the IPO window hasn't opened. When it does, maybe next September, you're I think going to see three or four names that will get a lot of attention. And they're all going to build themselves as the way to play AI. So stay tuned on that. In the meantime, just go buy Nvidia.

- Nvidia. That's what everyone seems to be doing, at least over the last several months. Adam Johnson, great to have you. Thanks.