Welcome to Smart Money! My name is Eric Fry, and I’m glad you’re here.
Wall Street has sold investors on the idea that they should start with “micro” analysis – the idea that they should make investment decisions by comparing things like price/earnings ratios, income statements or other company details.
But I do the opposite; I start with “macro” analysis.
I look for big-picture trends that drive huge, multiyear moves in entire sectors of the market.
I’m talking about trends that can spin off dozens of triple- and even quadruple-digit gains in just a few years.
Catching just one of these trends – at the right time – can help anyone accumulate enough capital to finance their dreams and to provide themselves with an enviable retirement…
When investors use a global macro strategy, they identify investment opportunities from a broad, global, top-down perspective, rather than by examining stocks one by one (a micro, bottom-up perspective).
And today, I want to highlight a trend you’ve likely been hearing about nonstop for the last few years: Artificial intelligence, or “AI.”
Investors know it… and CEOs really know it. Almost no company dares to conduct a conference call without highlighting the AI technology it’s adopting or developing.
Because of the growing buzz around AI technologies, investors are rushing into AI stocks of all sorts – hoping to give their portfolios a much-needed boost.
AI is an incredibly powerful – almost scary-powerful – megatrend, and the implications of its deployment will supercharge choice companies into previously unachievable milestones… including the coveted trillion-dollar market cap.
Yes, you read that right – trillion with a “t.” It’s a wildly sizeable number, but sure enough, several companies have joined the trillion-dollar club. Some of these companies include Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Saudi Aramco, Apple Inc. (AAPL) and Alphabet Inc. (GOOGL).
But with the power of AI, I believe that the next trillion-dollar companies are out there… and will reward their investors handsomely along the way.
So, here are my three picks for the next trillion-dollar AI companies…
Trillion-Dollar AI Stock No. 1: Intel Corp.
Intel Corp. (INTC) made headlines once again last year… the wrong kind. A disappointing quarterly earnings announcement triggered a massive 30% selloff. These downbeat results call into question any bullish expectations for Intel, including my own.
However, over the next few years I expect the unpopular shares of Intel to outperform the wildly popular shares of tech darling Nvidia Corp. (NVDA).
Admittedly, based on financial results from the last few years, Nvidia and Intel are not even in the same league. Nvidia is a major league Hall of Famer, while Intel is a little league benchwarmer. But the stock market valuations of both companies amply reflect the disparities between them.
For most of the last two decades, both stocks traded for a similar valuation, based on enterprise values (EV) to sales. But today, Nvidia trades for a whopping 32 times, while Intel trades for less than two times EV to sales.
Nvidia’s high-flying stock anticipates ongoing Hall of Fame results, while Intel’s depressed stock anticipates endless disappointment. It reflects a company that will continue riding the bench at the little league level for a long while.
Therein lies today’s investment opportunity. Even modest signs of improvement at Intel could propel the stock to much higher levels.
Clearly, Intel’s past has been disappointing in the extreme. But I’m not abandoning this name just yet.
In some situations like this one, I would suggest moving on to other opportunities, but I’m resisting that temptation with Intel. I believe the company’s long-term strategy will succeed… and generate substantial profit growth over the long term.
The core of this strategy is for Intel to become the dominant domestic manufacturer of semiconductors, while also boosting the competitive strengths of the chips it designs. These goals are still within reach, but they are excruciatingly difficult to achieve, and very expensive.
Intel is spending tens of billions of dollars to advance its goals, which is crippling its near-term profitability and straining its balance sheet.
The higher the price tag increases, the fewer the investors who applaud Intel’s strategy. They believe it is simply too costly and too risky. Maybe so, but Intel does not have the luxury of resting on its laurels.
No tech company ever does.
The business of technology is always and forever a business of rapid obsolescence. That’s why it is a business that requires massive, ongoing capital expenditures and research and development… especially in the wild, wild world of artificial intelligence.
AI is the most creative – and destructive – technological force that humanity has ever encountered, which is why all the major technology giants are ramping up their capital spending to prepare for it.
Intel’s ambitions may be audacious, bordering on outlandish, but their scale is not unique in the tech sector. As a New York Times story reported last year…
Big technology companies show no signs of slowing their spending on artificial intelligence, even though a payoff still looks a long way away… The tech industry’s biggest companies have made it clear over the last week that they have no intention of throttling their stunning levels of spending on artificial intelligence, even though investors are getting worried that a big payoff is further down the line than once thought.
In the second-quarter 2024 alone, Apple, Amazon, Meta, Microsoft, and Google’s parent company Alphabet spent a combined $59 billion on capital expenses, 63% more than a year earlier and 161% more than four years ago.
Intel is making a similarly massive commitment to the AI-centric world it anticipates. The critics say Intel cannot afford to make these investments. I say that Intel cannot afford not to make them.
As Sundar Pichai, CEO of Alphabet, has said, “The risk of underinvesting is dramatically greater than the risk of overinvesting.”
Trillion-Dollar AI Stock No. 2: PayPal Holdings Inc.
PayPal Holdings Inc. (PYPL) is a titan of the digital payments industry.
The company traces its history to the year 2000, when Elon Musk merged his online bank, X.com, with Peter Thiel’s software company, Confinity, to form PayPal. The merged entity started spinning gold almost immediately for Musk and Thiel, as the inventive pair sold the company to eBay just two years later for $1.5 billion.
Then in 2015, eBay spun out PayPal as a separately traded company, which it has remained ever since. (Interestingly, 2015 was also the year that Musk and Thiel partnered up again to form OpenAI, the company that would go on to create the AI sensation, ChatGPT.)
During the last several years, the tally of active accounts on PayPal’s platform has swelled 63% to 435 million, while the annual volume of processed payments on its platform has doubled to a whopping $1.37 trillion.
PayPal’s dominant position in the “branded checkout” segment has powered most of that growth. The “PayPal/Venmo” checkout button you might see when shopping online is an example of that business. 80% of the top 1,500 retailers in North America and Europe feature PayPal in their digital wallets.
But PayPal is not taking its success for granted. The company is fortifying its market leadership by integrating leading-edge AI and machine-learning processes into key aspects of its operations. For example, the company uses AI to detect fraudulent transactions and to boost the approval rate of valid transactions.
Buy Now, Pay Later
PayPal’s growth strategy relies on three key initiatives…
- Strengthening its core “branded checkout” solution…
- Growing its “unbranded checkout” solution…
- And developing and integrating AI processes that increase merchant sales, boost customer “stickiness,” and/or reduce operating expenses.
Branded Checkout is the foundation of PayPal’s business because of its high-margin fee structure. This business segment accounts for about one-third of the Total Payment Volumes (TPVs) the company processes, but it produces more than half of its total revenues.
PayPal is the market leader in branded online checkout with 35 million merchants on that platform. Although the company does not possess the commanding 99% merchant acceptance rate of legacy credit card companies like American Express and Mastercard, it has the largest acceptance rate of any “alternative payment method” (APM) provider. This category of payment solutions includes direct debit transactions, prepaid debit cards, and eWallets like PayPal, Venmo, Google Pay, and Apple Pay.
In 2020, PayPal launched a new “Buy Now, Pay Later” (BNPL) feature to bolster the appeal of its branded checkout offering.
This credit facility is similar to what established BNPL players like Klarna, Afterpay, and Affirm offer an immediate opportunity for shoppers to finance an online or in-store purchase at the point of sale.
Despite the brief operating history of PayPal’s BNPL offering, it has made rapid strides. Since launching BNPL, PayPal has issued loans to over 30 million customers. In 2022 alone, PayPal processed more than $20 billion of BNPL loans – up 160% from the prior year.
PayPal’s momentum in this market should propel it to undisputed leadership… and that’s no small matter in a sector that is growing as rapidly as BNPL consumerism.
BNPL-financed transactions account for more than $300 billion in transactions worldwide.
Importantly, this category of transaction delivers an outsized benefit to merchants. PayPal customers who adopt BNPL solutions spend 30% more through PayPal than those who do not.
As PayPal attempts to expand its presence in the BNPL market, it will benefit from one major competitive advantage. The company has preexisting relationships with a huge swathe of the target market – both the merchants and the individual consumers.
Unlike its competitors, which must win new business to establish a BNPL relationship with a merchant, PayPal can deliver BNPL capabilities as a “bolt-on” to an existing relationship.
PayPal simply incorporates BNPL functionality into the existing checkout protocol. It is not a “new sale.” For example, PayPal added BNPL capabilities to its existing relationship with Microsoft. Online shoppers at Microsoft’s Xbox Store can now access BNPL if they wish.
As CEO Dan Schulman explained…
Buy Now Pay Later continues to provide meaningful value to both our consumers and merchants. Over 32 million consumers have used our Buy Now Pay Later service since inception, at nearly 3 million merchants. We are now one of the most popular Buy Now, Pay Later services in the world… growing at 70% [year-over-year] on a currency-neutral basis.
Prudently, PayPal is working to “externalize” these loans by selling them to a third party, rather than retaining them on their own balance sheet. By selling the loans, PayPal removes the risk of holding bad loans.
The company took a giant step forward toward achieving that goal when it struck a deal to sell up to €40 billion of BNPL loans to the global investment firm KKR.
Under the terms of the agreement, KKR acquired PayPal’s existing European BNPL portfolio, along with future originations of eligible BNPL loans. PayPal will continue to conduct all the customer-facing activities of the loans, including underwriting and servicing.
This major transaction not only removes a large dollop of credit risk from PayPal’s balance sheet, but it also frees up capital to accelerate BNPL originations in Europe and/or to conduct shareholder-friendly activities like buying back stock.
Paving the Way
In addition to fortifying its leadership position in branded checkout, PayPal is expanding in the rapidly growing Unbranded Checkout segment.
The company refers to this solution as the PayPal Complete Payments (PPCP) platform, and it opens the door to a vast, new opportunity. Because this solution primarily serves small to mid-sized businesses, the total market opportunity is enormous. PayPal estimates the Total Addressable Market (TAM) to be roughly $750 billion.
The PPCP platform enables small businesses to accept credit cards and digital wallets as well as a range of Venmo and PayPal services. In April of 2023, PayPal gave this platform a major upgrade by adding Apple Pay to it.
That means that small businesses using PayPal as the backend for their payment processing can now accept Apple Pay alongside various other popular payment options.
Additionally, PayPal merchants can use their iPhone as a mobile point of sale terminal without the need for a dongle or other accessory device. Apple launched the technology in February of 2022.
CEO Schulman says that growing the unbranded checkout business has become a “strategic imperative” for PayPal – not just because it adds incremental revenue but also because it broadens and deepens customer relationships.
These expanded relationships produce vast troves of data that can fuel future AI enhancements.
Trillion-Dollar AI Stock No. 3: Oracle Corp.
This trillion-dollar company is not a “hidden gem.” It is not an overlooked “turnaround play.” It is not an up-and-coming tech newbie. It is one of the bluest of blue-chip stocks in the technology sector.
Its name is Oracle Corp. (ORCL).
I believe this company’s story, and its growth potential, is “Nvidia-like.”
Like Nvidia, Oracle is well known and not undervalued, based on traditional valuation metrics. On the other hand, investors might still be underestimating the company’s technological prowess and long-term earnings potential.
These characteristics resemble Nvidia’s investment profile from July 2022. At that time, Nvidia’s stock was trading for 23 times estimated next-year earnings, just like Oracle stock is today. Also at that time, Wall Street analysts were expecting Nvidia to generate 20% sales growth during the next two years, which is slightly less than the revenue growth analysts expect Oracle to generate during the next two years.
But of course, Nvidia trounced those expectations, which enabled the stock to skyrocket and become a modern-day legend. Since the end of July 2022, Nvidia shares have gained around 650%.
I am certainly not predicting an identical future for Oracle. However, I am expecting Oracle to surpass Wall Street’s current earnings expectations during the next two years, and, therefore, deliver a market-beating stock market result.
The company may be a legendary “old-timer” of the technology sector, but thanks to savvy, forward-looking strategic planning, it has become a dynamic AI play.
For starters, Oracle provides industry-leading cloud infrastructure solutions. Additionally, Oracle’s small but fast-growing healthcare solutions business could deliver surprisingly strong long-term growth.
Lastly, the company’s near-monopolistic data-base solutions can grow as rapidly as the cloud itself. Even Oracle’s direct competitors in the data center industry are integrating the company’s database solutions into their cloud offerings. In 2023, for example, Amazon’s Amazon Web Service (AWS) became the last of the “Big 3” cloud providers to strike a strategic partnership with Oracle.
This new alliance will enable AWS cloud customers to access the full functionality of Oracle’s data base solutions and integrate them with the apps available on AWS. Previously, Oracle has inked partnership deals with Microsoftand Google Cloud. Under the Google deal, for example, Oracle will run 12 Oracle Cloud Infrastructure (OCI) data centers inside the Google Cloud.
Major alliances like these will power long-term growth at Oracle, no matter which cloud providers gain the largest market share. But before examining other aspects of Oracle’s future growth potential, let’s take a brief look at the company’s past.
The Founding of This Blue-Chip Stock
In the late 1970s, Ellison, one of the three co-founders of Oracle, stumbled across a research paper that contained a detailed outline of a digital database. It was a way of using specialized software to organize data so that information could be retrieved efficiently, even when huge amounts of it is stored.
The company’s first customer – the CIA – called this product “Oracle” because it would provide them with all the answers.
Since then, Oracle has become an increasingly dominant database and cloud company. Roughly 98% of all Fortune 100 companies now use Oracle as their primary database, and the high switching costs of the technology has kept customers loyal. Migrating databases require rewriting existing code, and most IT departments would prefer to stay with existing providers than risk any data loss.
Oracle has also benefited from its early strategic decision to adopt both on-premise and cloud products. On-premise servers are charged licensing fees to use Oracle’s products, while its cloud services are provided as infrastructure-as-a-service. The two offerings generate roughly equal dollar-amount sales.
The Austin-based firm has also been pushing into other services. In 2016, the company bought NetSuite, an enterprise resource planning (ERP) firm focused on small and medium-sized businesses. In 2021, it bought Cerner, an electronic health record system.
Oracle operates the industry-standard for relational databases – a structured method of data storage that tracks where each piece of information is kept. It’s a system that’s used by everyone from financial institutions to GenAI companies.
These customers are now employing more data and processing power than ever before. Even Microsoft-backed OpenAI signed a major deal with Oracle after Microsoft allegedly failed to provide enough compute power to effectively run ChatGPT. Google inked a significant agreement with Oracle around the same time.
The main services OCI provides are…
- Infrastructure as a service (IaaS), which enables customers to build, deploy, and maintain secure, scalable environments.
- Software as a service (SaaS), which enables customers to build, deploy, integrate, and extend applications in the cloud.
- Oracle Autonomous Database, which provides workload-optimized cloud services for data warehousing and transaction processing.
Because OCI provides such a comprehensive suite of cloud solutions, the exponential growth of AI technologies will supercharge demand for those solutions, either on a stand-alone basis or as part of the offerings from major cloud providers like AWS.
For example, each new generation of large language models (LLMs) is using more parameters, more training data, and more “tokens.” Wolfram CEO Stephen Wolfram once calculated that every token (equivalent to 0.75 words) used by GPT-3 required 175 billion calculations to process. GPT-4 reportedly uses six times as much.
That will directly benefit Oracle, which charges customers based on database and computational usage. Oracle also stands to benefit from improvements in quantum computing. In March 2024, the firm partnered with Swiss startup QMware to explore hybrid quantum compute, where quantum simulations are run on Oracle’s Cloud Infrastructure. Future versions will likely have quantum computers working in parallel with traditional ones, given the strengths and weaknesses of each system.
And then there’s the whole healthcare “wild card.”
AI Healthcare Ambitions
In April 2024, Oracle joined the rush to the “Healthcare Belt” – a fast-growing hub of healthcare firms in Tennessee – by announcing it would be relocating its headquarters to Nashville. Explaining the move, Oracle founder Ellison stated bluntly, “It’s the center of the industry we’re most concerned about, which is the healthcare industry.”
It’s why Oracle spent $28 billion to purchase Cerner in 2022.
Days after Oracle closed its acquisition, Ellison outlined a compelling plan to build a new generation of modern, secure healthcare information systems. He detailed four specific benefits he expects the merger with Cerner to deliver…
- Better information for public healthcare policymaking.
- Easier interfaces for doctors and nurses.
- Improved data-based, communication channels for patients and doctors to talk and share data.
- Enhanced AI models for researchers and drug developers.
That last benefit is particularly fascinating because it stems directly from the unique power of AI.
As Oracle explains…
The new Oracle systems will be open so that technology partners and medical researchers will be able to develop AI-based modules and integrate them into the electronic health record system. Those modules will allow organizations with a great deal of domain expertise to share that expertise across the country and throughout the world. For example, Oracle partner Ronin worked with MD Anderson Cancer Center, one of the world’s top centers devoted to cancer patient care and research, to develop an AI module that monitors patients as they work through their treatment plans to reduce hospitalization.
The Cerner operations inside Oracle contribute less than 15% of total company revenues, but that percentage should grow rapidly as Ellison pursues his ambitions in, once again, the “industry we’re most concerned about, which is the healthcare industry.”
It’s hard to overstate the potential of these AI improvements in healthcare. The Federal Government currently spends more on Health and Human Services (25% of budget) than on any other department. In other words, we spend more on healthcare and Medicare than Social Security (23%) or the Department of Defense (12%).
The costs of medical care are only growing. By 2030, the Centers for Medicare & Medicaid Services believe that health spending will equal 32% of total U.S. GDP.
Here’s where Oracle’s AI ambitions come in. By using AI to help hospitals track patients… drug researchers to develop new therapies… and reduce costs in the system… Oracle aims to become a significant part of how Western healthcare will evolve for the 21st century.
Because Oracle’s cloud infrastructure and its healthcare operations both provide comprehensive services to entire industries, the company should benefit from the overall growth of both AI and healthcare. In effect, Oracle is neck deep into of the fastest growing aspects of the modern economy: AI and healthcare.
That makes Oracle an unequivocal “Buy.” Even if we don’t know which LLM will come out ahead or which drugmaker will use GenAI to discover the next cure for cancer, it’s clear that Oracle will benefit.
Moving Forward
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Regards,
Eric Fry
Editor, Smart Money
