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 months: 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.

During this year’s first-quarter conference calls, for example, the CEOs of S&P 500 companies used the term “AI” twice as often as they did during the previous quarter’s conference calls, according to an analysis by Reuters.

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 an inconceivable number, so much so that only five companies (at the time this report was written) have achieved that value: 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

As a Bible verse (and 1960s Byrds lyric) tells us, “There is a time for everything.”

Even a time to add Intel Corp. (INTC) to your watchlist.

Admittedly, the PC-centric tech world that Intel once dominated is a thing of the past. Further, a string of strategic missteps and manufacturing miscues caused Intel to lose market share in every key product category.

Since 2016, Intel has lost its share in both CPU chips (central processing units) and GPU chips (graphic processing units). Nevertheless, Intel remains the top dog and continues to grow revenue year by year.

And yet, in a stock market environment that’s dominated by sexy “story stocks,” Intel is a wallflower.

But Intel is not simply a “chip company;” it has the potential to become the next trillion-dollar AI company…

Ahead of the Game

Because of the release of ChatGPT, an AI-powered “chatbot” that can do everything from answering questions to writing essays, AI-focused investing has become the newest Wall Street sensation.

But that’s much easier said than done, as AI is difficult to invest in directly.

However, as we peel away at this onion, we find that a handful of semiconductor companies might offer an indirect play on AI.

Names like IBM Corp. (IBM), NVIDIA Corp. (NVDA), and, yes, Intel top the ranks of AI-chip producers. In fact, in 2017, Intel became the first semiconductor company in the world to generate more than $1 billion in sales from AI chips.

Importantly, Intel is the only company of these three that continues to operate fabs – and plans to invest tens of billions into building next-generation ones here in the United States. (IBM and NVIDIA design chips here at home, and then outsource the actual production to overseas companies like TSMC and Samsung.)

But that paradigm may be ending quickly…

Unpopular Opinion

The U.S. government is working to cut off the flow of advanced technology to China by incentivizing chipmakers like Intel to manufacture AI chips here in the States, rather than in East Asia.

The strategic thinking here is very basic: If the Chinese can’t manufacture or access cutting-edge chips, then they can’t build the data-center capacity they would need to train AI systems.

In such a world, Intel becomes an obvious go-to solution for U.S. chip designers like IBM and NVIDIA. Perhaps that’s why IBM has already structured a joint venture (JV) with Intel to develop AI chips – and why NVIDIA has stated publicly that it will consider contracting with Intel for the first time to produce some of its chips.

Apart from political considerations, the AI market itself is on the verge of explosive growth. IDC estimates that worldwide spending on AI systems will nearly triple to $300 billion by 2026. From that level, McKinsey predicts the AI market will soar to $1 trillion by 2030.

Intel stands at the ready with a roster of offerings that can help power the AI Revolution.

The company’s NCS2 is its latest chip that was developed specifically for deep learning. Also, the brand-new Gaudi2 AI chip, designed by Intel’s Israel-based Habana Labs, is twice as fast as its first-generation predecessor.

Chips like the Gaudi line accelerate the particular math calculations at the heart of today’s AI technology. A third-generation Gaudi3 is already in development.

These powerful, next-generation chips enable AI models to “learn” by processing complex real-world data to find patterns more quickly and economically.

And even though Intel is still widely unpopular, I recommend adding it to your AI watchlist… because I can see it becoming one of the next trillion-dollar AI companies.

Trillion-Dollar AI Stock No. 2: Pfizer

Pfizer Inc. (PFE), the grandaddy of U.S. drug companies, traces its history back to 1849. That’s when two recent German immigrants, Charles Pfizer and Charles Erhart, teamed up to start a new business in Brooklyn, New York.

Relying on Pfizer’s skills as a chemist and Erhart’s training as a confectioner, the pair produced the company’s first product, a palatable antiparasitic drug called Sanonin, made to taste like toffee.

Since then, Pfizer has developed or acquired a long list of blockbuster medicines – everything from Terramycin, the first purely synthesized, broad-spectrum antibiotic, to ChapStick to Advil to Viagra.

Most recently, Pfizer codeveloped and marketed the leading COVID vaccine, followed up by the market-leading COVID treatment. Those achievements produced a doubling in annual sales from less than $50 billion in 2021 to a record-high $101 billion 2022.

But now that the pandemic has faded into the history books, Pfizer’s annual COVID-related drug sales have atrophied from a peak of about $60 billion to less than $13 billion… and they’re falling.

Meanwhile, no major revenues from new-to-market drugs have rushed in to fill the void. That’s why the stock has been falling, and why Wall Street has been turning a cold shoulder to it.

But Pfizer has weathered numerous boom-bust episodes in the past… and it is preparing to repeat that accomplishment – both by applying AI across its drug-development programs and by making targeted acquisitions.

For example, the company is among the early adopters of Google Cloud’s new AI-powered Target and Lead Identification Suite, which enables “in silico” drug design (i.e., drug development that takes place on computers, rather than in a lab). Because in silico analyses operate more rapidly than traditional lab work, researchers can quickly discover high-quality drug candidates and cost-effectively test them.

As Shweta Maniar, global director of healthcare and life sciences at Google Cloud, stated, “When you’re talking about something that normally takes 12 months, if we can even reduce that by half or by 75%, that’s pretty significant.”

In 2023, Pfizer also struck a multiyear strategic collaboration with Tempus, a leader in artificial intelligence and precision medicine. Pfizer expects this collaboration to advance its oncology drug development in two key ways…

Gather insights from Tempus’s multimodal data that will inform novel drug discovery and development in oncology. In other words, help Pfizer identify potential therapies “from scratch.”
Accelerate the development of Pfizer’s in-house oncology portfolio by using Tempus’s AI-enabled platform, including Tempus’s clinical trial matching program that rapidly activates studies for patients in communities across the country.

In addition to these AI initiatives, Pfizer has been actively acquiring biotech companies that could benefit from enhanced AI capabilities. During the last two years, Pfizer has spent $60 billion to acquire four companies, including the blockbuster $43 billion purchase of Seagen Inc., a pioneer in antibody–drug conjugates (ADCs) to treat cancer. This drug technology treats a broad range of cancers by precisely targeting and killing cancers cells, while also limiting undesirable “off-target” toxicities.

With the addition of Seagen’s four breakthrough oncology drugs – Adcetris for Hodgkin’s lymphoma, Padcev for bladder cancer, Tivdak for cervical cancer, and Tukysa for breast cancer – Pfizer’s industry-leading oncology portfolio now includes over 25 approved medicines across more than 40 indications.

The Seagen acquisition also doubles the size of Pfizer’s oncology pipeline to 60 programs spanning multiple modalities, including ADCs, small molecules, bispecific antibodies, and other immunotherapies. Including this oncology pipeline, Pfizer is advancing 112 drugs through clinical trials, 31 of which are in Phase 3.

Pfizer has high hopes for several of these medicines and believes they could achieve blockbuster status. For example, Pfizer’s Elranatamab, a recently approved drug that treats an incurable type of blood cancer, could become a “mega blockbuster,” according to Chris Boshoff, chief development officer of Pfizer’s oncology and rare disease unit.

To be sure, Pfizer will need more than a couple blockbusters to compensate for the $20 billion in annual revenue that will disappear over the next four years, as six of its major drugs lose patent protection.

But Pfizer’s growing roster of drug programs, accelerated by its AI collaborations, could produce a surprising string of commercial successes over the coming years. And yet, the stock is priced for continuing disappointment.

It is trading for just 12 times this year’s estimated earnings and yielding a hefty 6.5%. At that low valuation, PFE offers an outstanding risk/reward proposition.

You can review the Fry’s Investment Report Buy List for my most up-to-date buy advice.

Trillion-Dollar AI Stock No. 3: PayPal

PayPal 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 five years, the tally of active accounts on PayPal’s platform has swelled 63% to 430 million, while the annual volume of processed payments on its platform has doubled to a whopping $1.5 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 – which is nearly three times more than the No. 2 player, Apple Pay.

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.

But despite the company’s formidable competitive position and superior growth prospects, the stock took a hit last May when the quarterly earnings report disappointed Wall Street analysts.

However, I believe this short-term selloff is providing an excellent opportunity to purchase a leader in the financial technology world…

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 its total revenues.

PayPal is the market leader in branded online checkout with 35 million merchants on that platform. And 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.

Three years ago, 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 Holdings Inc. (AFRM) 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 in 2020, PayPal has issued loans to nearly 30 million customers. In 2022 alone, PayPal processed more than $20 billion of BNPL loans – up 160% from the prior year.

Thanks to that rapid growth, PayPal’s 13% market share in the U.S. is nearly identical to that of the No. 1 player, Afterpay. PayPal’s momentum in this market should propel it to undisputed leadership by next year… and that’s no small matter in a sector that is growing as rapidly as BNPL consumerism.

According to GlobalData.com, the global BNPL market size will top $309 billion this year – up more than 150% during the last two years. BNPL-financed transactions now account for about 4% of all online purchases worldwide – up from less than 1% four years ago.

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, earlier this year, 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 recently…

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 last month 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 will acquire 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 boosted its unbranded business by 30% last year – lifting this sector’s contribution to total revenues to 28%.

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. Last year, 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 Inc. (AAPL) launched the technology in February.

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.

The Next Step in AI Innovation

Schulman explains…

Enabling our merchants with our unbranded service helps ensure that we have a deep relationship with our most important merchants… [This] will provide a constant stream of incremental data to feed our AI engines and fuel our next-generation checkout platform. We believe no other company will be able to replicate the unique nature and scale of our dataset. And in the future, our AI engines will use that data to drive differentiated capabilities to improve the entire checkout experience for our merchants.

We anticipate that this combination of initiatives will enable our unbranded services to become a clear market leader, drive additional growth in our branded checkout, enable our next generation of checkout, and provide new sources of margin growth…

Already, PayPal is applying AI-derived insights from its vast customer base to optimize the checkout process for merchants and consumers. Specifically, PayPal has significantly reduced both false negatives (declines) and false positives (fraudulent charges) during the checkout process.

A false negative occurs when a card issuer declines a transaction, even though the cardholder has a sufficient credit or cash balance available for the purchase.
A false positive occurs when a card issuer approves a transaction that is fraudulent.

Both forms of false readings cause billions of dollars in lost revenue. A 2022 study conducted by checkout.com and Oxford Economics found that false card declines cost merchants in the U.K., U.S., France, and Germany about $50 billion in 2022 – a 150% increase in three years.

But PayPal’s platform is moving that needle in the other direction; it is significantly reducing both false positives and false negatives.

As a processor of more than $1.3 trillion in transactions, even the slightest improvement to authorization rates or fraud rates can add billions of dollars in revenue.

PayPal boasts that its authorization rates are about 600 basis points better than the industry average. That means 100 every time that consumers attempt a transaction, PayPal approves six more of them than the average competitor would.

The secret sauce that makes this industry-leading error prevention possible is a PayPal solution that combines the company’s AI and machine-learning capabilities with extensive data sets.

PayPal’s machine-learning models help predict in advance if a card issuer will decline a specific cardholder’s transaction. If the model anticipates a decline, it creates a custom solution in real time for the cardholder to remedy the problem and produce a completed transaction.

For example, PayPal can propose an alternate payment method within a user’s PayPal wallet that has been successful in the past. The company can also prompt a secondary form of authentication to validate the transaction.

To detect and nullify fraudulent transactions, PayPal leans heavily on its captive, in-house data to inform and is an adaptive machine learning solution called PayPal Fraud Protection Advanced that helps merchants protect against evolving fraud.

Based on the 24 billion transactions PayPal processes annually, it gathers vital intelligence about both the merchant and the consumer on each transaction. The company’s machine-learning model then interacts with that data during the checkout process to identify anomalies or suspicious patterns that indicate fraudulent activity.

PayPal also expects AI to play an increasingly important role inside its own operations.

Again to Schulman…

We are just at the beginning of a multi-year efficiency journey…With the new advances of generative AI, we will be able to accelerate our productivity initiatives. We expect AI will enable us to meaningfully lower our costs for years to come… I think there’s no question that A.I. is going to impact almost every function inside of PayPal, whether it be our front office, back office, marketing, legal, engineering, you name it.

There’s a lot of efficiency to be gained as we look forward… This is about doing things better than we’ve done before at higher accuracy than we’ve done before and doing them at a lower cost. I imagine you’ll see our cost structure come down quite significantly over the next 2 to 3 years and our ability to do things just get better.

Peering into 2024, the consensus of Wall Street analysts expects non-GAAP EPS to top $5.50 this year and $6.25 in 2025. At those levels of profitability, the stock would be trading for just 11 times 2024 earnings and 10 times the 2025 result.

Incredibly, that valuation is roughly one-half the valuation of the S&P 500 Index. I expect that discounted valuation to disappear over the coming months, as PayPal enters a new growth phase and as its AI capabilities fatten the profit margins on that growth.

One year from now, I expect to see PayPal’s stock trading at a premium to the S&P 500’s valuation, just like it has during most of the last seven years.

Moving Forward

I’m so glad that you decided to further your journey to wealth by joining Smart Money.

Nearly every Tuesday, Thursday, and Saturday, you’ll receive an email from me, wherein I’ll share insights on the latest market “megatrends”, how to act on them and more.

Get started by visiting your Smart Money website here.

Regards,

Eric Fry

Editor, Smart Money

3 AI-Driven Stocks That Will Be the Next Trillion-Dollar Companies