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The 4th Industrial Revolution Is Upon Us: Prepare Your Portfolio

Daniel Laboe

The 4th industrial revolution is upon us, and it is time to adjust your portfolio for the next wave of tech that will run our future economy.

The 1st industrial revolution was characterized by mechanization led by water power and the steam engine. The 2nd was mass production powered by electricity driven by oil-based power. The digital revolution or 3rd industrial revolution started 50 years ago and is coming to an end as the 4th industrial revolution takes form.

This 4th industrial revolution is building on the digital revolution emphasizing intelligence and information. Big data, cloud computing, and the illustrious artificial intelligence are going to drive the world economy as technology and information grow exponentially.

AI is always evolving and changing like a living body. The market for this technology is proliferating and is expected to reach $100s of billions in less than a decade. In this piece, I am going to take a look at a couple of AI-driven stocks that will prepare your portfolio for the 4th industrial revolution.

Twilio TWLO

Twilio is a platform-as-a-service (PaaS) company that provides customers with a cloud-based programming platform, aka application programming interface (API), for digitalized communication. This interface gives developers the ability to add voice communication, messaging, video, as well as communication-based security to any mobile application or website.

Twilio has developed a conversational AI interface called Autopilot that developers can manipulate to serve their needs. Autopilot allows developers to easily build intelligent IVRs, bots, and Alexa Apps that will continuously learn and modify, making them smarter with each use.

Contact centers are optimal for this type of AI to be implemented, being typically repetitive, and data-heavy tasks. The goal of Twilio’s Autopilot in contact centers is to seamlessly facilitate a genuine interaction between the customer and their contact, whether it be an AI for simple tasks or an agent for a real human touch.

The cloud-based “platform serves over 180 countries today, making it as simple to communicate from São Paulo as it is from San Francisco”, according to Twilio’s most recent annual report. Active customer accounts have almost tripled in the past year from 57,350 to 161,869, which the company reported in its Q2 earnings.

Twilio’s topline has been accelerating, illustrating consistent quarter-over-quarter growth since the company went public 3 years ago with a CAGR of 47%. TWLO share appreciated 440% since the beginning of 2018 due to investors’ excitement about the firm’s AI capabilities.

Unfortunately, TWLO’s 2-year price surge also ballooned its valuation metrics. Its forward P/S traded up to 19x in the first quarter of being publicly traded in 2016 then bottom out in 2018 at 4.6x. Today it is trading at a forward P/S of 13x doubling the software industry, and well above the firm’s 3-year median of 8.9x.

Twilio is an exciting company that has seen a tremendous amount of growth in the last 3 years and expected to see over 70% topline growth this year. Its current valuation isn’t compelling me to put a huge bet on this stock, especially with recent market volatility, but I do see a significant amount of long term potential in this AI player. A small position could go a long way in a stock with such a bullish narrative.

Nvidia NVDA

Nvidia’s claim to fame is its graphics processing unit (GPU) which it invented to take PC gaming to the next level. Now 2 decades later, the same technology is being used for hyper-fast data analytics and developing artificial intelligence. GPUs are becoming a necessity for datacenters to compete in a market where nanoseconds make a difference. Nvidia controls over 97% of the datacenter GPU market (according to Market Watch) and is well-positioned to be the sole GPU to develop AI.

There was an enormous push to expand datacenter infrastructure the past 3 years to give firms the flexibility to hyperscale their computing services as customer needs proliferate — hyperscale computing combined with the crypto-mining bubble induced manic demand for Nvidia’s powerful, light-speed GPUs.

Over the past 3 years, Nvidia’s datacenter revenue has grown 333% but has slowed down this year with the crypto-craze abating and datacenters still digesting the massive amount of tech they bought the prior year.

We are going to see another boost in hyperscaling infrastructure with deep learning and AI development. GPUs are an essential part of this development, and Nvidia’s top-notch technology will drive artificial intelligence to new levels of productivity. Nvidia has almost no competition in this market because of the niche technology required to meet deep learning needs.

NVDA is trading at a forward P/E of 35.3x, which is in line with its 5-year median but far above the sectors average of 16.1x. Nvidia has a lot of potential priced in as investors see this firm as a crucial building block to develop AI.

NVDA’s valuation has been growing with the stock price but is still quite a bit below its high of 55x it hit back in 2017. I have enormous confidence in this company as a long term play, especially with its market positioning. Market volatility and the economy shaking trade war may hurt NVDA’s short term share price. I am waiting for another dip to get it in, but for long term investors, I like this stock at any price below $200.

Take Away

Artificial intelligence is undoubtedly going to change the world in which we live. Its inherent capabilities are beyond our comprehension, and its impending market will reach every corner of the economy. These two AI stocks will make a great long-term play for anybody’s portfolio. Market volatility could impact short-term gains, but these stocks have an enormous amount of growth potential in the future.

 

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