Okay, it’s the decade of AI. Everyone’s got it now. We all agree.

Here’s the market cap and percentage gains in some of the most important AI-focused stocks since the launch of ChatGPT at the end of November, 2022…

The big guys first, Nvidia, Microsoft and Alphabet:

Here’s the smaller group of AI stocks I have been talking about, AMD, Arista Networks and Super Micro Computer:

Look at these numbers going up. Incredible:

This group of stocks (among others) have become the most associated with the AI opportunity. Alphabet and Microsoft are probably going to be the biggest platform players and the most adept at weaving AI services into their existing software products. Arista Networks and Super Micro Computer supply critical components to the buildout of AI-enabled data centers. And, of course, there is Nvidia and AMD, the premier semiconductor companies supplying GPUs and non-linear processors (and the related software) that allow for AI workflows to amaze and delight the end-users of all this technology.

So what’s next?

That’s quite a starting squad. But there are going to be others. It’s impossible for this to be a multi-trillion dollar opportunity without there being more beneficiaries. So start thinking about whom those other AI winners could be.

That’s what Dan Dolev and his colleague Sean Kennedy at Mizuho did. Dan’s known for covering fintech and payments companies like Visa, PayPal, SoFi and Toast. But this week he initiated coverage on a new group of stocks that will be critical to the AI opportunity and applied his “four pillars” analysis to their fundamentals.

Before we go any further - I do not give financial advice on the internet. Nothing I say here - today or ever - is meant as specific financial advice for you. See my nine million word disclaimer if you’re still having trouble understanding this.

Okay we’re back.

When I read the report, I knew immediately that Dan and Sean had a great point - the number one thing the millions of companies and organizations and governments and universities are going to need during the AI Revolution is advice. Dan wants us to take a look at the companies that give that advice - huge IT consultants who can tell CTOs and corporations what equipment to buy, which services to utilize, how to implement, how to scale, etc. The AI advice business is a global opportunity and a small handful of companies are going to absolutely dominate at the high end. They’re going to experience a wave of organic demand growth unlike anything we’ve ever seen, including during the early days of the internet. Because when the internet started, it wasn’t clear how important it would be for traditional businesses outside of dot com bubble in California. So they dabbled and experimented.

There are plenty of ideas but execution will be crucial. That’s where the IT companies come in. I work in the advice business. I understand the trajectory for these kinds of things. There’s a great big wave headed to shore and everyone wants to know how they can paddle out and ride it. I would be willing to bet the phones are ringing off the hook for IT companies who know how to build and implement an AI strategy. That’s where I want to place my bets as the concept turns into a full-blown rollout.

These are not capital-intensive companies trying to set up chip fabs or build data centers. They’re advisors. When a technology wave like this comes in, earnings can really ramp without a concomitant increase in SG&A or costs. You’ll see them invest more to capture the opportunity, but not like they’re building physical products.

Dan and Sean did a lot of the heavy lifting in their note, but here is the thesis behind the initiation of coverage:

IT Services stocks

First thing’s first - IT Services are a meaningful and growing part of overall IT spend. This is where things stood as of the end of 2022:

And, according to their work, it turns out that IT spending is growing at a much faster rate than global GDP (which is intuitive). My best guess is this pace actually picks up to capitalize on the AI opportunity.

Mizuho says:

So the pond you’re fishing in is the right pond. Which fish are worth catching?

They picked three names as their favorites in the group.

Here’s the largest player and a name you have probably heard of, Accenture (ACN):

This one’s Globant SA (founded in Argentina, based in Luxembourg, doing business globally):

This one is new to me, and looks like it’s in need of a turnaround, but they like it. It’s called EPAM, the name of the company and the ticker symbol. That early 2022 crash is related to Russia vs Ukraine somehow but I haven’t looked into it.

According to the analysts, all three will be major players in the adoption and implementation of generative AI this decade. I’m keeping all three on my radar alongside Super Micro, AMD and the rest of the names mentioned above.

What Are Your Thoughts

Michael and I discussed this next AI trade and a whole bunch of other crucial stuff on What Are Your Thoughts last night. You can skip ahead to the AI section at the 21 minute mark:

And, of course, you can listen to the show as well on The Compound and Friends show on your favorite podcast app as always. Also on the podcast this week - I talked to Dan Toomey of Morning Brew who is one of the funniest people doing finance content on the web these days. Dan is a standup comic who happens to make finance videos about topics like private equity, consulting, business school, etc. He’s built a big following among the Gen Z set who are new to the workforce and trying to understand what’s going on.

Listen to the whole conversation here:

Ok, that’s it from me. Talk soon. - Josh