- Don’t listen to the fearmongers: America leads the world in AI
- Does that cloud look like rain? Check the AI…
- Visa just made a very expensive acquisition. Smart move.
Dear Reader,
Before we get to today’s issue, there’s one update I need to bring to your attention.
On Wednesday, January 22 at 8 p.m. ET, I’m hosting a very special event. During this online summit, I’ll reveal a project I’ve been quietly working on for the past five years. It’s a system designed to pinpoint small tech stocks before they climb hundreds of percent in days or even hours.
Too incredible to believe? See for yourself right here.
In other news…
Yesterday, the U.S. and China signed Phase 1 of their trade agreement, and I’m happy to say that it is substantive. It is also very relevant to the tech sector.
China agreed to increase purchases by $200 billion over the next two years. Manufactured goods, energy, technology, and agriculture are the largest components of the agreement.
A critical part of the agreement for the technology sector was the language on preventing and punishing the theft of trade secrets and intellectual property.
This has been an issue for decades on a global scale. This agreement will not only benefit the U.S. but all foreign companies who are conducting business with China.
The agreement also contains strong language and commitments by China not to devalue its currency. Obviously, artificially devaluing a currency directly impacts how “cheap” a country’s exports are. This agreement will set a more level playing field for trade relations.
And while there is meaningful tariff relief included in the Phase 1 agreement, tariffs remain on $370 billion worth of Chinese-made goods, which represents about 75% of the country’s exports to the U.S.
Why so much?
Simple: Phase 1 is just the beginning. Negotiations for Phase 2 are expected to begin immediately. The remaining tariffs are a strong incentive for continued progress toward an even broader-reaching, mutually fair, and reasonable trade relationship between the two countries.
This is fantastic news for the tech sector, for the U.S. equity markets, for international trade relations with China, and for us as investors.
I’m already excited about what Phase 2 will bring…
Now on to our insights…
Investment in AI companies hit a record high in 2019…
Venture capital (VC) investment in artificial intelligence (AI) companies hit $18.5 billion last year – an increase of 10% over 2018. We have never seen this level of investment in AI before in history…
Now, some members of Congress have proclaimed that the U.S. needs to direct more federal funds toward investment in AI and machine learning (ML). They say the U.S. is falling behind China in this regard.
Here’s how Senator Martin Heinrich put it in May 2019:
“China’s emergence in the AI space poses a grave danger to an ethical, global adoption of standards and uses of these technologies… We simply cannot allow this type of unethical use of technologies to proliferate around the globe. That’s what will happen if we don’t step up our efforts here domestically.”
What these lawmakers fail to see is that more than $150 billion has already been invested into early stage AI companies in the private sector. That’s why the U.S. continues to lead the world in AI/ML technology.
Unlike China, the funding has come from private capital, not from the government. And that investment is much greater than what has been made in China to date.
Research institutions, academic institutions, and the early stage tech sector are booming with AI developments as a result of this avalanche of private investment.
So I am excited about what’s going to happen in AI/ML this year. Any time we see record levels of investment in one sector, it is always followed by a rash of breakthroughs.
And I expect we’ll see another record year for AI investment in 2020. In fact, I expect more than $20 billion to flow into early stage AI companies this year.
So if the mainstream press or politicians claim that the United States is behind in artificial intelligence funding, it’s simply not true.
And, of course, this has major implications for tech investors.
Many early stage AI companies will be acquired this year. And I’m hoping some of these companies remain independent long enough to consider going public later this year. That would make for some incredible investment opportunities.
I’ll be keeping a close eye on the hottest early stage companies in this space. AI/ML will continue to be a key area of focus for me in 2020.
Google is now forecasting the weather…
Speaking of AI…
Google is now forecasting the weather. And it is doing so more accurately than what the National Oceanic and Atmospheric Administration (NOAA) and our local weather folks are capable of. And it all comes down to AI…
Right now, the NOAA and traditional weather forecasters use physics-based simulations to get their forecasts. These require an immense amount of computing power. They have to process up to 100 terabytes of data from weather stations every day. As a result, it takes six hours to compute a forecast.
Well, that means they can only run three, maybe four, simulations each day. And they are constantly six hours behind with each forecast. That’s why the forecasts aren’t always accurate.
Google’s advantage is that it doesn’t care about the physics-based model. All it cares about is the real-time data.
And Google is using a form of AI called convolutional neural networks (CNN) to apply to the real-time data. That enables it to make short-term weather forecasts that are more accurate than those coming from the physics-based model.
And here’s the best part, Google’s CNN model can produce the forecasts in a matter of seconds, not hours.
Plus, Google’s forecasts are accurate out to about six hours into the future. That will give people extra time to prepare for inclement weather when it arises.
And here’s the big picture – AI helps to democratize intelligence. Historically, only large entities like the NOAA have had access to the massive databases and the expensive computing power required to make weather forecasts.
Not anymore.
With AI, any early stage company can get access to the data necessary to forecast the weather… or produce something of value in any industry.
What’s more, the fact that Google can make better weather forecasts without understanding the physics behind it is telling. This proves that companies don’t have to be subject matter experts to apply AI in a particular way. All they need is access to the data. Then the AI will take care of the rest.
Now, this technology hasn’t been rolled out into any consumer-facing products yet. But it’s just a matter of time. Our daily lives are about to get much easier thanks to artificial intelligence.
A big move in FinTech…
Credit card giant Visa just acquired an interesting financial technology (fintech) company called Plaid for $5.3 billion. Ultimately, this is a great move given the innovations taking place in fintech right now. But the price tag is shocking…
Reportedly, Plaid generated between $100 and $200 million in revenue each year. If we assume the high end of that range, Visa’s acquisition took place at an enterprise value-to-sales (EV/sales) ratio of 26.5. That’s a ridiculously high valuation.
And if we assume the low end of that revenue range, this acquisition happened at an EV/sales ratio of 50. That’s nosebleed levels.
So Visa paid a shockingly high price for this company. That tells us it wanted Plaid very badly.
Now, Plaid is a great company. It’s what’s known as an application programming interface (API) company. Think of it like an intermediary or “bridge” that allows two applications to communicate.
Plaid’s APIs plug into traditional banking systems. They are the glue between our bank accounts and the financial applications that we use on our phones or computers.
For example, Plaid powers payment network Venmo. It powers the commission-free stock-trading platform Robinhood. And it even powers digital asset giant Coinbase. Put simply, it connects our traditional banking accounts to these next-generation financial services providers.
I bet many of us have used at least one of Plaid’s applications and never even known it. It’s an amazingly functional company operating in the background.
I was really hoping Plaid was going to go public. It would have made for a terrific investment opportunity. But I must say that this is a smart acquisition by Visa.
If we think about it, Visa’s infrastructure has been in place for decades. It’s the incumbent. So acquiring Plaid puts Visa in a position between traditional banking institutions and new financial services.
That said, I wouldn’t recommend investors go out and buy Visa’s stock, hoping to get exposure to Plaid. The revenue that will be generated from Plaid will only be a blip on the radar for Visa.
A much better approach would be to look for similar API companies. For instance, readers of my small-cap research service, Exponential Tech Investor, locked in gains of 239% in four months and later 211% in just over a year with API company Twilio (TWLO).
Yes, we traded the stock twice. That’s how incredible the right API play can be.
Now, Twilio’s APIs dealt with messaging, not financial transactions. But this goes to demonstrate the potential of these types of businesses. And rest assured, I’m on the lookout for more API investment targets.
Regards,
Jeff Brown
Editor, The Bleeding Edge
P.S. Speaking of early stage companies going public, I believe 2020 will bring with it a record number of IPOs. In fact, I believe we will surpass the previous record set in 2001. That’s a trend I’m excited to follow this year, and I am especially interested in one tiny corner of this market.
I have discovered a small group of early stage stocks that come with a “timer” attached to them when they go public. The timer differs per stock, but it’s known to us in advance… though the specifics are buried in government-mandated paperwork.
But here’s the thing – when that timer hits zero, these stocks can skyrocket 100% or more in a matter of hours. I’ve never seen such an exhilarating opportunity in the markets before.
And what I love most is that this is an opportunity available only to everyday retail investors. These stocks are just too small for the hedge funds to get into – that is, until the stock price explodes and the company’s market capitalization rises.
My publisher has asked me to pull back the curtain on this incredible opportunity. So I’ve agreed to participate in a special event on Wednesday of next week.
There, I will be sharing with readers exactly how these “timed stocks” work and how we can reap massive gains on them in a very short period.
If you are interested, the event will take place on January 22 at 8 p.m. ET. Simply go right here to get all the details.
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