Colin’s Note: Last month, I warned you to beware of “fake AI stocks” that have been lagging behind their competitors in the semiconductor industry.
I want to return to that today in the wake of Nvidia’s earnings report on Wednesday… And remind you that it can be easy to get swept away in all the excitement and buzz surrounding AI stocks.
But not all AI companies will see equal success as the technology advances and the AI megatrend continues to grow. There will be winners… And there will certainly be losers.
We’re looking today at one such company – this time in the software space. It’s quickly falling behind in the AI race… Something I predicted barely a month after ChatGPT launched.
Click below for all the details in today’s video…
Hello, Bleeding Edge subscribers. Hopefully, you guys are doing well.
I tell you what, on Wednesday we got Nvidia earnings and it highlighted everything that we knew about AI stocks and AI investing.
First of all, demand from the largest companies in the world not only remains strong, but it’s accelerating. That has to do with a couple of different things.
It has a lot to do with interest rates having been basically zero for a lot of these large corporations over the past 20 years. So you had Microsoft, Google, and Apple borrowing hundreds of billions of dollars and they used that to expand their business.
Part of it was Covid. You had record demand flood into tech stocks. It increased revenue and profits at these companies.
Part of it also is regulation. Washington doesn’t allow companies like Microsoft, Google, Amazon, and Apple to make acquisitions very easily.
So these companies have tens of billions of dollars, in some cases, more than $100 billion of cash just sitting in the bank.
What does that mean? Companies like Microsoft, Google, and Amazon are going to use that cash. And right now the best use of that cash is to buy Nvidia chips to build out AI software and services. They’re going to upgrade with the latest and greatest Nvidia chips probably for the next couple of years.
Microsoft is building out a Copilot suite where they’re layering AI on the software they’ve been selling since the 1970s and 1980s.
Google is going to revolutionize and change its search engine that’s been the same for the past 25 years.
And Amazon – the world’s largest cloud provider – has to buy Nvidia chips to put them into their cloud so other small businesses out there can use them.
Then below that, there’s a second tier of software and cloud provider that also benefited during the pandemic and from record low interest rates and borrowing rates over the past 20 years. And they’re going to provide another layer of demand for Nvidia chips going forward.
Look, to meet all this demand, chip manufacturers and chip equipment makers will have their hands full. And this is going to continue easily into next year and likely for the next couple of years.
But don’t be fooled. There will be plenty of losers in this AI race as well.
One we identified early on was Fiverr. I wrote about this company more than a year ago in January of 2023, warning readers that ChatGPT was a threat to Fiverr’s business.
At the time, ChatGPT was barely a month old. When I was brought on here to Brown STAR Research, I alerted our subscribers and our paid subscribers as well to the fact that Fiverr is one of these fake AI companies.
Most of the investing world has never even heard of Fiverr, let alone used it. There’s little understanding of what it does.
And if you simply read the company and the executive conference calls, the CEO is going to be talking about AI. And they’re going to be talking about how it’s a net benefit and it’s good for the company. You might look at the company’s clever advertisements, which I think are actually pretty cool.
You might start to think Fiverr is primed to do well in the age of AI. But I’ve used Fiverr. Not only as a buyer, but I’ve made a few thousand bucks selling essentially backlinks to websites that I own on the service. So I’ve used it both as a buyer and a seller.
Immediately I understood that ChatGPT was going to make low-end blog writing, logo creation, and other gig work more or less obsolete on the site.
When Fiverr reported earnings this week, shares plummeted nearly 20% on weaker-than-expected demand for the company’s services. Over the past year, shares of Fiverr are down about 50%.
Imagine holding shares of Fiverr and watching Nvidia shares skyrocket. Microsoft, Google, Amazon, Taiwan Semiconductor, Adobe, Uber… I mean, the list goes on of companies benefiting from AI and watching their share price appreciate.
Imagine owning Fiverr stock and watching it go down 50%.
That’s because it was a fake AI stock.
In this new world of AI where you have this massive investment, there are going to be two types of companies. There will be software companies like Microsoft that will layer on AI and then layer on additional costs to all of their existing customers. But then there will be customers or companies like Fiverr that are going to be able to layer on AI, but it won’t do anything to the company’s revenue or margins or profits.
Companies like Google are going to be able to use AI to make its already popular search engine even better. But AI is not going to allow Fiverr to make their business any better than before.
I tell you what, if you have a keen sense of understanding technology, these types of plays are going to be easy to avoid and easy to identify over the coming years.
If you’re into software, if you’re into the internet, if you’re into technology, fortunes are going to be made over the next couple of years as AI and AI investing remain really hot.
But it’s not going to come without its risks. Companies like Fiverr, which are essentially fake AI companies, remind us that not every company in the tech sector is going to benefit.
And I will do my best over the coming weeks, months, and years ahead to help you avoid and maybe identify some of the best companies in the sector.
Hopefully, you guys have a wonderful weekend. I’ll see you again next week. Good luck with your investments.
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