This Subsector Is Spreading Like Wildfire…

David Fessler By David Fessler, Energy and Infrastructure Strategist, The Oxford Club

Market Trends

It’s not every day something comes along that will disrupt every segment of business and every segment of our lives.

But artificial intelligence (AI) is going to do just that.

And there are plenty of companies poised to make billions from the growth of AI. It’s spreading like wildfire. If you want to get in on the action, you need to act quickly.

So what is AI, anyway? It’s the ability of a machine (with a powerful computer inside) to mimic the brainpower of humans. It can learn and actually solve problems.

Until recently, computers didn’t have the processing power needed to crunch the amount of data in AI problems. But that’s no longer the case.

Now hardware platforms can process thousands of instructions in parallel, millions of times per second. It’s that kind of power AI demands.

Let me give you an example: IBM Corporation’s (NYSE: IBM) Watson supercomputer. IBM engineers developed Watson specifically to solve AI problems.

It’s IBM’s $15 billion thinking machine. Today’s supercomputers, like Watson, have the ability to perform many tasks simultaneously.

Watson is an amazing machine. It can read 1 million books per second.

But its ability to absorb data at blazing speeds is only a small part of what Watson can do. Watson can answer questions posed to it in English or a number of other languages.

Watson’s architecture consists of several different parts. It uses advanced natural language processing algorithms to decode the questions posed to it.

Next, it retrieves information from 16,000 gigabytes of RAM. It has 90 IBM servers and can process 2,880 instructions at a rate of 500 gigabytes of data per second.

Since IBM first introduced Watson a little more than a decade ago, its size has shrunk from that of a master bedroom to that of three pizza boxes stacked on top of one another. This is Fessler’s First Law of Technology, “Technology marches on,” at its finest.

As I mentioned, Watson and all other AI rely on algorithms to function.

Algorithms are sets of rules that are followed in a problem-solving exercise. That makes algorithms especially adaptable for use on computers.

Algorithms have been around for a long time. The oldest known one is the Euclidean algorithm, developed around 300 B.C.

Euclid was an ancient Greek mathematician. His algorithm calculates the greatest common divisor of two numbers.

The Euclidean algorithm is still in wide use today by cryptographers. They decode encrypted communications.

Algorithms can also automate the reasoning process, do data processing and perform calculations. The computers that are executing algorithms can do so blazingly fast.

AI and the algorithms behind it are quickly becoming part of our daily lives. In most cases, we don’t even realize it.

For instance, an AI algorithm determines the news feed you see on your social media platform (Facebook, Instagram, etc.). Another decides your Netflix movie recommendations.

Listening to music on Pandora? It uses AI algorithms to analyze up to 400 song characteristics to serve up your next song.

If you recently bought something online after searching for it on Google, you made use of Google’s PageRank algorithm to find it. Google then uses other algorithms to show you ads of similar items to buy.

And then there’s high-frequency trading. Estimates are that AI trading algorithms controlled by computers execute up to 70% of all stock trades made daily.

AI is a useful tool for quickly finding answers that involve sifting through massive amounts of data. I’m talking about data that would take a team of people years to look through.

AI computers can do it in a matter of seconds. They can answer questions like “Do people spend more money when it’s sunny or rainy?”

“Where do they spend it?” and “How much do they spend?”

“Do they talk on the phone more when it’s raining or snowing?” and “What specific items do they buy before a snowstorm?”

AI-Focused Companies

AI applications are just getting started in most business sectors. Readers who follow me know I have a thing for pick-and-shovel plays.

Now, I’m not saying there’s anything wrong with having a few shares of IBM in your AI portfolio. After all, it’s going to be exploiting Watson all over the place.

Over the last year, IBM shares have gone up 17.5%, and the company pays a nice 3.21% dividend. It’s also one of the top Dow blue chip stocks.

And don’t forget the “FANG” stocks. I’m talking about Facebook (Nasdaq: FB), Amazon.com Inc. (Nasdaq: AMZN), Netflix Inc. (Nasdaq: NFLX) and Google, now called Alphabet Inc. (Nasdaq: GOOGL).

You may not think of them as AI companies, but they all use AI extensively in their respective businesses.

And they are all moat stocks. Chances are slim that any other company will be able to successfully compete against them. That makes them great investments and great AI plays.

However, one of the best AI pick-and-shovel plays is also a great semiconductor play. I’m talking about NVIDIA Corporation (Nasdaq: NVDA).

NVIDIA is the world’s foremost graphics processing unit (GPU) maker. Besides applications in the gaming world, NVIDIA GPUs combine with today’s fastest central processing units to tackle AI’s toughest problems.

GPUs process massive amounts of data in parallel, enabling computers like Watson to work. NVIDIA has been making GPUs since 1999.

Its current chips are several years ahead of those of its closest competitor. NVIDIA shares are up a blistering 211% over the last year.

I recommended NVIDIA in my trading service, Advanced Energy Strategist, in July 2016. Now we’re sitting on gains of 124.15%.

And there’s still room to run. The demand for NVIDIA GPUs continues to grow along with AI applications.

Regardless of the computer platform, NVIDIA GPUs are the engines behind the coming AI boom.

Savvy investors should consider adding companies like NVIDIA and others with AI exposure to their portfolios.

Good investing,

Dave