Friday, July 14, 2023
If you've been following financial news lately, you've no doubt seen a steady diet of stories about Artificial Intelligence ("AI").
I get it. Following the debut of ChatGPT, the first true consumer-facing AI application, Wall Street has been enamored with a field I’ve been following for at least 20 years.
Understandably, much of the AI publicity is focused on a handful of big tech leaders – ones like Meta (META), which is using it in its social media networks, and Microsoft (MSFT), which has embedded the technology in its "Bing" search engine.
Don't get me wrong. Those are both great companies.
But you and I know the real money to be made in tech stocks isn't found on such low-hanging fruit.
The real money can be found in big backend plays, preferably smaller firms that can make money no matter who wins the AI arms race. And I've found one you need to know about...
Let me start by explaining how I found this company.
One particular field is vital to the explosion in computer traffic that online AI is causing.
All those images, chat sessions, videos, software bundles, and more must all pass through the same place.
That place is hidden from public. But it plays an increasingly vital role in our tech-driven economy now being supercharged by AI.
Of course, I'm talking about data centers – cloud-computing facilities that house stacks of computer servers and miles of interconnect cables and switches.
In fact, there’s so much high-bandwidth information moving through Web connections that we've entered the era of hyperscale data centers, one that taps advanced chips and lightning-fast connections to offer services to mega-cap leaders like Microsoft and Meta.
This is big business. Arizton Advisory & Intelligence says the data-center market will be worth $288 billion by 2027, up from $215 billion in 2021.
Here's a piece of data I believe helps set the stage in understanding AI's growing volume:
At the height of the pandemic, we saw nearly 300 million video chats per day. But AI can be even more bandwidth-heavy than video. See, Nvidia (NVDA) has said that by the end of this year, we could see AI models that have 100 trillion or more connections.
For reference, we have roughly 100 million credit-card transactions every day in the U.S. Nvidia is talking about an AI that has 1,000 times more than that.
Granted, not all of that will pass through data centers on a daily basis. But there’s no denying that, for AI to work properly in a distributed world, we simply must have robust data centers.
And I’ve uncovered a company that fits the bill perfectly. It even counts Meta and Microsoft as clients.
Even better, the company I have in mind doesn't actually run cloud-computing centers. Instead, it's a key supplier to them, making this the ultimate AI backend play.
The firm is a maker of the high-speed network equipment that data centers rely on to connect multiple servers and the Internet without creating logjams that slow it all down.
This is a Silicon Valley company that has deep expertise in this type of technology. After all, it was formed in 2004 by one of the cofounders of the storied Sun Microsystems, which was at the forefront of workstations and computer servers.
In other words, this is a company that understands how to find and target highly profitable trends.
No wonder its biggest source of revenue is ultra-fast switches, small boxes that route traffic to the exact server it needs to go to at lightning speeds.
On paper, it sounds straight forward. But it's a daunting task.
The firm's data center-grade switches can route a stream of information to the right destination in under 500 nanoseconds. That's just 500 millionths of a second.
One of the things I really like about this company is that it takes a conservative approach. Sure, it could jump on Wall Street's bandwagon and hype itself as an AI play.
But it has done just the opposite. In a recent conference call with analysts, the firm's Chief Financial Officer noted that it is not pinning its hopes on AI.
"We look at it as a good underpinning of kind of future momentum and demand, particularly from some of the larger hyperscale customers," the executive said.
Fortunately for us, there's a lot more going on here than just AI. The company is also set to profit from the bandwidth needs that are integral to virtual and augmented reality ("AR" and "VR").
Each requires advanced video and audio processing, along with 3D modeling and spatial awareness that would grind to a halt without high-speed switches and interconnects.
The company, however, does more than network switches. It provides a full suite of monitoring and protection tools and software for network equipment. These tools allow for the stability and safety of data centers to be monitored automatically using AI tools.
Add it up and you can see why this is an earnings growth winner. Over the last three years, the company has grown per-share profits at an average of 31%, which means they double every two-and-a-half years.
The company is expected to report quarterly earnings on July 31. And if it happens to miss and the stock sells off, I'd view that as a big buying opportunity.
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Cheers and Good Investing,
Chief Investment Officer
Trend Trader Daily