The common thinking is the Mark Twain argument, that – “in a gold rush it’s a good time to be in the picks & shovels business”
And since Nvidia’s chips and Microsoft’s OpenAI are deemed the AI “picks and shovels”, that’s how investors are getting exposure
BUT we think this only holds true, if:
a) you’re unsure who’d find “gold”
b) you pay a fair price for a “pick and shoveller”
If you knew who’d find gold, wouldn’t you rather own THAT business?
So, who is finding “AI gold”?
Well, according to a Salesforce Survey in 2023, “82% of business leaders say generative AI will lower overall business cost and 80% say generative AI will increase revenue.”
ie. most companies
And if AI can help cut costs, then the real beneficiaries could be companies with low profit margins
Think about it – if operating margins are only 2%, then costs are 98% of sales
That’s a lot for AI to work with – cutting costs by 1% of sales could increase earnings by 50% in this example
Except most Quality / Growth portfolios don’t own businesses with 2% operating margins…
Take the food retailers for example
Those with loyalty card programs have vast amounts of data -that’s “AI gold”
They know:
– what we buy
– when we buy
– where we buy
– how much we pay
They know how our buying patterns change over the month, our response to promotions, and even the weather at purchase
AI is helping them drive revenue growth with personalised promotions and dynamic pricing
Which improves their demand forecasts lowering wastage & logistics costs
And better inventory control improves cash flow
Now consider banks that many Quality & Growth investors also shun
In contrast to Amazon which only knows our discretionary spend on Amazon
But banks know our income AND every $ of our spend
on EVERY “platform” – Real “AI gold”
So banks are using AI to:
more accurately price additional credit – increases revenue
improve customer service via Chatbots & improve realtime fraud detection – lower costs
Maybe the market is waking up to this because
Kroger’s share price is up 25% this year, beating Amazon +19%
The MSCI World Banks Index is up 13% this year, beating Microsoft +12%
Meanwhile, Apple and Tesla are down 11% and 30% respectively…
Remember too that Nvidia’s largest customers are the large tech companies
So Nvidia’s revenue is THEIR capital expenditure…
Last quarter MSFT’s capex rose 58% y/y, Alphabet’s rose 45%
So if you think Nvidia’s revenue will still explode, you better start worrying about their customers’ “free” cash flow
DISCLOSURE
Ranmore Global Equity Fund holds some select banks and food retailers, including Kroger
And none of the “Mag 7”
The content of this marketing material is provided for information purposes only and is not advice
Past performance is no guarantee of future performance
At Ranmore, we think Value investing is the best way to “play AI”
A