Seeking Alpha

The AI Portfolio: 40% Growth YoY,  Review And Adjustments

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Includes: AMD, AMZN, ATVI, BA, BABA, CRM, CRWD, DE, DELL, DIA, DIS, GOOG, IBM, ILMN, INTC, LMT, MDB, MSFT, NFLX, NVDA, ORCL, PANW, PSO, QQQ, TCEHY, TSLA, WDC
by: Ramy Taraboulsi, CFA
Ramy Taraboulsi, CFA
Long/short equity, special situations, Growth, contrarian
Summary

In January 2019, I proposed a new economic model through an article published in Seeking Alpha.

Part of the last year’s article was a portfolio of 12 companies representing the world leaders at that time in AI; The portfolio generated a 40% growth year over year.

The portfolio is expanded this year to include new companies in other industries that were not addressed in the original report.

A comprehensive review of the industries associated with the companies selected will be provided in different articles, one article per industry, to be published shortly.

Summary

In January 2019, Seeking Alpha published an article that I had written titled: “Governments And Central Banks Got It Wrong; Will They Learn?” which presented a new economic model in the world resulting from the introduction of AI systems in the different industries. The article was selected as an Editor’s Pick, and it prompted a few different organizations to invite me as a keynote speaker about this topic in their conferences.

The last section of this article (about 35 pages) presented a portfolio of 13 companies (12 public ones) that may be construed as the world leaders in AI and associated industries. For each area of leadership, I selected just a few companies.

At the end of the January 2019 article, I indicated that: “I am personally expecting this portfolio performance to far surpass that of the major indices.” This article assesses whether my expectation came to fruition or I was wrong about my recommendations.

This report does not address the new economic model that governments and central banks need to operate under. The model presented in last year’s report, in my opinion, still stands intact with the new taxation system, global universal income, perpetual growth, low inflation, marginalized central banks and the rise of corporations. This report rather looks at how the portfolio performed in 2019, and what the new portfolio should look like for this year.

Spoiler Alert: The portfolio exceeded the overall market return by a healthy margin.

This article also expands on the industries that are using AI and increases the size of the portfolio of public companies from 12 to 25. All the companies that were mentioned in the previous report still remain in the new portfolio, but their relative weights are now changed.

Original Equity Portfolio Composition

The 12 public companies that I recommended a year ago were (in alphabetical order), and the leadership position that each of these companies is holding, are next presented; some of these companies are involved in more than one area, for example, IBM is involved in AI software and database management, and NVIDIA is involved in AI hardware and AI software.

  • Alphabet (GOOG) (NASDAQ:GOOGL) (leadership in AI software)
  • Amazon (AMZN) (leadership in AI software)
  • Dell (DELL) (leadership in data storage)
  • Disney (DIS) (leadership in entertainment and original content)
  • IBM (IBM) (leadership in AI software)
  • Microsoft (MSFT) (leadership in AI software)
  • MongoDB (MDB) (leadership in database management)
  • Netflix (NFLX) (leadership in entertainment and original content)
  • NVIDIA (NVDA) (leadership in AI hardware)
  • Oracle (ORCL) (leadership in database management and data storage)
  • Palo Alto Networks (PANW) (leadership in cyber security)
  • Tesla (TSLA) (leadership in AI hardware)

The following table holds the capitalization and price of each of these companies at the time of the original article, together with my personal suggested relative weight associated with each:

Company

Symbol

Capitalization

Price

Relative Weight

Alphabet

GOOG

$383.97

$1,098.26

1

Amazon

AMZN

$829.39

$1,696.20

2

Dell

DELL

$7.58

$32.20

2

Disney

DIS

$165.52

$111.04

3

IBM

IBM

$112.53

$123.82

3

Microsoft

MSFT

$826.81

$107.71

2

MongoDB

MDB

$2.84

$80.34

1

Netflix

NFLX

$147.88

$339.10

2

NVIDIA

NVDA

$95.73

$156.93

3

Oracle

ORCL

$176.83

$49.27

1

Palo Alto Networks

PANW

$19.29

$203.30

2

Tesla

TSLA

$51.91

$203.26

3

Source: Seeking Alpha article: Governments And Central Banks Got It Wrong; Will They Learn? The relative weight represents how much the portfolio will allocate to this stock. For example, Amazon’s investment would be twice as much as Alphabet’s investment and IBM’s investment would be three times as much as Oracle’s investment.

Current Equity Portfolio Performance

Over the last year, all the stocks in the portfolio went up with a minimum of 9% and a maximum of 111% with the exception of one single company that dropped by 2.7%. The overall profit for the portfolio over one year amounted to 39.93% following the allocation that I had suggested.

The following table shows the performance of the different stocks based on an initial investment of $10M as of January 2nd, 2019:

Source: Compiled by Author; spreadsheet can be downloaded

The 40% compares favourably against the S&P 500 (NYSEARCA:SPY) (29%), the NASDAQ (QQQ) (35%) and Dow Jones (DIA) (22%) as reported in the January 2nd, 2019, CNBC report.

I had expected the portfolio to be performing much better than the 40% that it generated. The key damper to the portfolio was Netflix, the only company that had a negative performance during the year. Netflix lost primarily because of the change in the competitive landscape, which did not have a high correlation to its usage of AI and the generation of new content. IBM also, despite its relatively high weight, did not perform as well as I had originally expected. The saviour for the portfolio was Tesla, which on its own, accounted for 33% of the overall increase in the portfolio.

What changed in 2019?

According to PWC’s comprehensive report on AI, global GDP will be up to 14% higher in 2030 as a result of the accelerating development and take-up of AI. This is the equivalent of an additional $15.7 trillion, making it the biggest commercial opportunity in today’s fast-changing economy. The report also indicates that “The biggest sector gains will be in retail, financial services and healthcare as AI increases productivity, product quality and consumption.”

Source: PWC Report, “Sizing the prize

2019 was a turning point in Artificial Intelligence. The following list highlights ten key advancements in the different sectors that are using artificial intelligence including Games, Entertainment and Video Streaming.

Personal Opinion: I consider games, entertainment and video streaming as key elements that will play a critical part in the new world controlled by AI. Games, entertainment and video streaming would be essential for reducing the potential of social unrest resulting from high unemployment caused by the adoption of AI systems in all areas of our world. This is the reason that I am including these sectors in this analysis.

What are the industries?

The different industries that were reviewed (each of which will have its own report) together with their impact on the portfolio are:

  • Agriculture
  • Cybersecurity
  • Education
  • Financial Services
  • Gaming
  • Hardware – Disk Storage
  • Hardware – Processor Development
  • Healthcare
  • Military and Defense
  • Software – AI Applications
  • Software – Database Management
  • Transportation and Self-Driving Vehicles
  • Video Streaming, Entertainment and Original Content

Each one of these industries will be addressed in a separate article; the content of these articles is already written, and their publication will be staggered across a few weeks.

Agriculture

Source: Gibabit Magazine: Smart farming: Alternative uses of advanced technologies

I am adding Deere & Company (DE) to the portfolio. Because of the limited focus on AI compared to other companies, I would put it at a low weight. I am also adding Alibaba (BABA) to the portfolio. Alibaba is added at a high weight because of its involvement in other industries and its extensive usage of AI in its other operations.

Cybersecurity

Source: Geospacial World, “Dire need of prioritizing cybersecurity in the age of AI

I am adding CrowdStrike (CRWD) at a low weight to the portfolio. Because of their focus on AI for its new products, I would keep Palo Alto Networks at a medium weight.

Education

Source: www.gettingsmart.com: Artificial Intelligence: Preparing Students for the Future with AI

I am keeping Alphabet in the portfolio, increasing its weight to a high weight and adding Pearson (PSO) at a low weight.

Financial Services

Source: Gateway TechnoLabs “Artificial Intelligence – Important Role in Financial Services Industry

I am keeping IBM in the portfolio, reducing its weight from high to low, and adding Alibaba with a high weight.

Gaming

Source: YouTube

I am keeping Alphabet in the portfolio with a high weight. I am also adding both Tencent (OTCPK:TCEHY) at a medium weight and Activision Blizzard (ATVI) at a low weight.

Hardware – Disk Storage

Source: Accelerating Analytics and AI from the Edge to the Cloud, by Kevin Huiskes, Director Marketing, Data Center Group – Intel and Radhika Rangarajan, Director Engineering –Intel

I am keeping Dell in the portfolio with a low weight, and adding both Western Digital (WDC) at low weight and Intel (NASDAQ:INTC) at medium weight.

Hardware – Processor Development

Source: The Motley Fool, Danny Vena, “The AI Chip Market Is Heating Up - 3 Important Developments You May Have Missed

I am keeping NVIDIA in the portfolio with a high weight, and adding both Advanced Micro Devices (AMD) at a low weight and Intel at a medium weight.

Healthcare

Source: Datameer, “Healthcare and Artificial Intelligence: Saving Lives and Costs

I am putting Illumina (ILMN) as a new addition to the portfolio with a low weight.

Military and Defense

Source: Military & Aerospace Electronics, Concern growing in the Pentagon that U.S. artificial intelligence (AI) technology may be falling behind

I am adding both Lockheed Martin (LMT) and Boeing (BA) to the portfolio with low weights.

Software – AI Applications

Source: G2, “Best Artificial Intelligence Software

I am keeping Amazon at a medium weight, IBM at a low weight, Microsoft at a medium weight and Alphabet at a high weight. I am also adding Salesforce (CRM) at a low weight, Tencent at a medium weight and Alibaba at a high weight.

Software – Database Management

Source: AI Databases, What You Need to Know

I am keeping Oracle at a low weight, Microsoft at a medium weight and MongoDB at a low weight. I am also adding Salesforce at a low weight.

Transportation and Self-driving Vehicles

Source: SAE International Releases Updated Visual Chart for Its “Levels of Driving Automation” Standard for Self-Driving Vehicles

I am keeping Tesla in the portfolio with a high weight and increasing Alphabet to a high weight.

Video Streaming, Entertainment and Original Content

Source: PC Magazine, “The Best Video Streaming Services for 2020

I am keeping Amazon at a medium weight, Disney at a medium weight and reducing Netflix to a low weight.

Proposed Portfolio Changes (Additions/Removals)

As a summary, here is the status of the original holdings and how the weights have changed for them. Please note that all the original holdings remain in the portfolio, and only some of the weights have changed. As an overall impact, because the new portfolio now has 25 companies instead of 12, the relative weight for the original companies has mostly dropped.

The following table shows the companies in the new portfolio. Companies with an old weight of 0 are new to the portfolio.

Source: Spreadsheet created by author

Conclusion

AI will continue being the driver for the economic growth in the future. For an organization to be successful in their AI endeavours, regardless of its industry, it needs to possess abundant high-quality data. This is the data that would be used for training the AI systems, allowing them to make the proper decisions based on the data. Most larger companies are very well-positioned to capitalize on AI, primarily because these are the companies that possess this data.

The amount of hype that is happening in the market nowadays about AI is comparable to what happened in the market in the late 90’s related to the Internet and ended up with the dot-com bubble burst. The Internet fulfilled all the promises that were touted and the successful Internet companies turned to be the largest 5 companies in the world now as shown in the next chart:

Source: SymbolSurfing, “Largest Companies By Market Cap” as of December 18, 2019

Personal Opinion: While the hype is big about AI systems and their applications, I believe it is distinctly different from other technologies, including the Internet, in the fact that there is no plateau for AI. With AI, once we get neural networks to modify their own structures (I expect this within a couple of years), effectively creating new neural networks, the growth of AI systems will grow geometrically, and even exponentially. Of course, some companies will disappear, and I believe that the current leaders in AI (which I tried to compile in this article) will continue to prosper.

These detailed reports about each industry will try to cut through the hype and identify the top companies that are capitalizing on Artificial Intelligence in the specific industries and the rationale for selecting the companies that were compiled in the portfolio. Please note that the weights selected in the portfolio relied on the company capitalization and how much of its business is associated with AI. You can play with this portfolio and monitor its performance by downloading it.

Personal Opinion: I believe that this portfolio of 25 companies will exceed the performance of the overall market by a healthy margin.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DIS, NVDA, TCEHY, TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I regularly trade on all of these stocks by writing naked put options on them; If the put options are assigned, I write call options to close my position, and I tend to do that on a weekly basis.