During the great American Gold Rush of the late 1840s and early 1850s, approximately 300,000 people migrated to California in hopes of striking it rich.
A few got lucky and became overnight success stories. But the overwhelming majority of these individuals went broke.
Meanwhile, do you know who made the first million dollars during the Gold Rush?
It wasn’t a gold miner – it was Sam Brannan, the owner of a general store who sold the mining equipment that all the would-be millionaires needed as they sought their gold fortunes.
This anecdote is what gives rise to the investment phrase “a picks and shovels play.”
Why take the risky route of trying to strike gold when you get take the more conservative path, growing incrementally wealthier by supplying critical infrastructure to all the gamblers out there.
So, how do we do this with AI?
Well, there are a handful of ways, but let’s zero in on just one in today’s Digest…
Data centers.
The coming tsunami of AI products requires the same thing – data processing
We don’t know who will come out on top as the preeminent AI company, but we do know one thing…
Every AI company that’s in the running for that title will require huge volumes of processing power, data storage, and energy. So, why not invest there?
Here’s how our technology expert and the editor of Early Stage Investor, Luke Lango, put it earlier this year:
Data centers [are required] to expand cloud computing capacity to be sufficient to handle numerous advanced AI applications…
Of course, this data center construction boom will also benefit domestic engineering, construction, and building materials firms. But the bigger plays here will be found in the providers of critical data center components, like networking equipment, cooling equipment, virtualization software, and more.
These companies should benefit massively from a domestic data center construction boom.
And this comes from Globest.com:
The rapid expansion of U.S. data center capacity to support the demand for artificial intelligence will double the size of the industry by 2030, measured in gigawatts…
The surge in power consumption will be driven by an industry-wide upgrade to data center campuses that are being rebuilt or newly developed to meet the huge data processing demands of AI and its cousin, machine learning (ML), the report said.
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So, how might you play it?
If you Google “top data center stocks,” you’ll get a number of names to begin your research, including:
- Equinix
- Google
- Nvidia
- Fortinet
- AMD
- Arista
But I’ll give you two options directly from our experts.
The first pick comes from Eric Fry, editor of Investment Report and The Speculator. He has been urging his readers to invest in IBM for many months now.
In fact, back in January, Speculator subscribers closed out a portion of their IBM trade for nearly 300% gains. Then about a week later, they took profits on a second IBM trade for 450% gains.
From Eric’s analysis from last fall:
IBM has been reinventing itself as a hybrid cloud and artificial intelligence company. To accelerate this transformation, the company has been pursuing an out-with-old-in-with-the-new growth strategy.
Since 2019, IBM has divested 17 legacy businesses, while also making more than 30 acquisitions…
Because IBM’s fast-growing AI and hybrid cloud businesses will power most of its future growth, I expect the company to become a dominant leader of the AI boom.
Though IBM has rewarded investors handsomely over the last year, its role as an AI data center leader should provide snowballing profits (and a climbing share price) for years to come.
I'll add that IBM is down 8% as I write in the wake of the company's earnings release this morning. While earnings topped estimates, revenues were slightly lower than expected
Based on today's news, Eric is recommending his Speculator subscribers lock in gains of roughly 240% on their final portion of their IBM trade.
To be clear, the long-term case for IBM's AI/data center leadership remains. Eric's "close" recommendation is more a reflection of a market veteran deciding to protect big profits in a trade. We'll let you know if Eric's long-term analysis of IBM changes materially.
Our second play comes from Luke Lango in his Early Stage Investor service. It’s the data center company, Vertiv. This is a more targeted play than IBM.
It turns out Vertiv announced earnings yesterday that provide a fantastic illustration of the snowballing demand for data centers.
From Vertiv’s press release:
First quarter 2024 organic orders up 60% compared to first quarter 2023, book-to-bill ratio 1.5x in first quarter 2024 and record high $6.3 billion backlog at the end of first quarter 2024…
Vertiv’s stock spiked as much as 19% during yesterday’s session in the wake of the news. And as I write today, with the broad market tanking, Vertiv is up another 8%.
Luke’s Early Stage Investor subscribers got in roughly two months ago. They’re up 49%, but if Luke’s right, this is just a taste of the gains that Vertiv will produce over the coming years.
IBM’s path should be smoother than Vertiv’s, but the potential upside is likely greater in Vertiv than IBM (IBM’s market cap is more than 5X the size of Vertiv’s, so it’ll be harder to move the needle there).
Wrapping up, yes, AI is going to change everything…
But for most businesses, making money off AI right now isn’t clear or easy.
As investors, we can make it clearer and easier by focusing on where the growth is happening, and the money is flowing, right now. And that points us in one direction…
Data centers.
We’ll keep you updated.
Have a good evening,
Jeff Remsburg
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