Best AI Stock in Best AI Sector

Hello Investing Friend!!

I hope you had a great weekend!! If not, I have a multi-bagger stock for you to make you forget your troubles!!

Seven years ago I wrote an article pointing out that we did not need to take on too much risk in order to invest in some of the most exciting upside in new growth areas. 

Specifically, I said in order to get exposure to the broad theme of an AI inflection point, we could invest in stocks that already have ample cash flows. It looked like these stocks did not have some of the risk characteristics of growth stocks, but retained the upside.

I identified six particular stocks (MSFT is in blue):

Those six stocks have had an average return of 267%, nearly doubling the S&P 500’s 141%, and with 1.5 times the dividend yield as well.

Not too shabby. 

It sure would be nice, though, if we could find this dynamic in a small stock with a narrower focus. Keep the cash flow shield, but concentrate the potential returns more than a mega-cap stock.

So let’s give it a shot. Let’s see if we can find a small cap with exposure to one of the best growth areas as well as ample cash flows. 

And what are the best growth areas? AI is coming for us all, like it or not.  But instead of just investing in a general AI inflection point, let’s see if we can narrow our focus a little more. 

McKinsey published a report last year titled “The Economic Potential of Generative AI: The Next Productivity Frontier”. Generative AI is AI that can create new content like conversation (think ChatGPT), images, or music. The potential is in the trillions, and there are a handful of standout areas that look ripe for explosive investment growth: 

“Generative AI’s impact on productivity could add trillions of dollars in value to the global economy. Our latest research estimates that generative AI could add the equivalent of $2.6 trillion to $4.4 trillion annually across the 63 use cases we analyzed—by comparison, the United Kingdom’s entire GDP in 2021 was $3.1 trillion…

…About 75 percent of the value that generative AI use cases could deliver falls across four areas: Customer operations, marketing and sales, software engineering, and R&D… 

…Generative AI could have an impact on most business functions; however, a few stand out when measured by the technology’s impact as a share of functional cost (Exhibit 3). Our analysis of 16 business functions identified just four—customer operations, marketing and sales, software engineering, and research and development—that could account for approximately 75 percent of the total annual value from generative AI use cases.”

OK, now we are getting somewhere. AI is set to double the size of the economy – but not AI in all areas. The areas of customer operations, marketing and sales, software engineering, and R&D should represent the lion’s share of the growth. 

Of those, customer operations has the most impact per dollar spent. McKinsey continues:

“Generative AI has the potential to revolutionize the entire customer operations function, improving the customer experience and agent productivity through digital self-service and enhancing and augmenting agent skills. The technology has already gained traction in customer service because of its ability to automate interactions with customers using natural language. Research found that at one company with 5,000 customer service agents, the application of generative AI increased issue resolution by 14 percent an hour and reduced the time spent handling an issue by 9 percent.¹ It also reduced agent attrition and requests to speak to a manager by 25 percent. Crucially, productivity and quality of service improved most among less-experienced agents…

…We estimate that applying generative AI to customer care functions could increase productivity at a value ranging from 30 to 45 percent of current function costs.”

OK, so generative AI in customer operations looks like one the very best AI investing opportunities, with mammoth upside. Are there any good stocks here? Further, are there any that have ample cash flows?

Indeed. The AI customer operations stock with ample cash flows and looks like a huge winner to us is…

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Best,

Joe Springer