Follow the Money Into AI’s Next Breakthrough

From a 30,000-foot view, earnings for the first quarter have been on fire and we’re following it into AI’s next breakthrough.

Most companies in the S&P 500 have reported, and a vast majority beat estimates.

And they’re beating expectations at a nice clip with average earnings growth at 5%.

If that growth rate holds for the quarter, it will be the highest year-over-year earnings growth rate since the second quarter of 2022.

But I won’t expand on what you might already know.

I want to take a deep dive, specifically into tech earnings, as they lead the charge.

And there’s a simple reason why.

Tech Net Profits Continue to Rise

Earnings are pretty simple on the surface: You either have more earnings-per-share (EPS) and revenue, or you have less.

The challenge is understanding what earnings and revenue actually are.

Earnings are more than those headline numbers. So today, I’m going to dive into net profit margin.

This shows how much of each dollar a company collects as revenue translates into profit.

Because the more profit a company makes, the more cash it has to spend on things like research and expansion.

This is where tech companies stand out:

Real estate leads the pack, and that makes a lot of sense. Home prices have ballooned alongside interest rates. But I want you to focus on that second bar from the left in the chart above.

Information technology net profits grew from 22.4% in the first quarter last year to 25.5% this year. But why?

That three percentage point rise doesn’t seem that impressive, until you consider the scale. We’re talking about billions (if not trillions) of dollars in profits.

Well, for one, Big Tech companies like Google, Amazon and Apple have slashed staff in an effort to control operating and overhead costs.

It worked as Google’s net profit margin jumped from 21.6% in March 2023 to 29.4% a year later. More recently, Amazon posted a 13% increase in its first-quarter 2024 revenue while profits surged to $10.4 billion.

I’m throwing a lot of numbers at you, but here’s what it boils down to…

Higher net profits give Big Tech companies more flexibility to invest in new technology, hire personnel or spend on mergers and acquisitions. For more on this, check out my recent essay for Money & Markets Daily.

The bigger question here is: Where is Big Tech spending all of its excess cash?

Well, I have an answer there too…

3 Areas Highlight Big Tech Spending

The U.S. Technology Demand Indicator is a survey showing what companies intend to spend on tech.

It recently hit 52.1, a mark not seen in two years:

Note: Any reading above 50 means expansion, while a reading below 50 indicates contraction in the market.

S&P Global ran the numbers, and the increase in tech spending can be attributed to three things: artificial intelligence (AI), cloud infrastructure and information security (the last two are related to the first).

This should be a massive boost to the growing AI mega trend.

Here are a few points worth internalizing:

  • Big Tech revenues will continue to climb as companies across all 11 S&P 500 sectors pump more money into AI and its related technologies/infrastructure. In 2023 alone, companies spent an estimated $154 billion.
  • This highlights just how big the AI sector is now … and will be in the future. The global generative AI market was worth $44.9 billion last year and is expected to reach $207 billion by 2030.

This increase in AI spending is already showing in tech stocks.

More than half of best-performing tech companies cited AI demand as the biggest reason their stock price has gone up, S&P Global found.

To get more specifics, I ran a stock screen of tech companies with a $5 billion market cap or higher and gains of more than 100% over the last 12 months.

Stocks like Super Micro Computers Inc. (Nasdaq: SMCI), which is up nearly 500% over the last 12 months and almost 200% year to date.

MicroStrategy Inc. (Nasdaq: MSTR) — which uses AI in its business intelligence platform — jumped almost 300% in 12 months and more than 100% in 2024.

Those are just a few of the AI-related stocks experiencing massive gains thanks to the early onset of the AI mega trend.

I believe we are still in that early adoption phase, and the gains made by these companies — and others like them — aren’t finished yet.

The Next Phase of the AI Mega Trend

The companies experiencing gains on the back of the AI mega trend are just the tip of the iceberg.

They either use AI in products or are producing components needed to meet AI demand now.

But it takes more than chips and servers to make AI “tick.”

This innovative tech needs significant infrastructure — not just to operate, but to expand.

One component is critical … and Big Tech companies are already investing millions of their own dollars in it.

Money & Markets Chief Investment Strategist Adam O’Dell has identified the one company developing this technology … and it’s the next evolution in the AI mega trend.

This company has built a moat around itself by spending billions on research and development, as well as cutting through the red tape to get its tech to market.

It’s also lightyears ahead of any other business in the space.

In fact, Big Tech firms, with their recent infusion of net profits, will look to this one small company to help expand AI into industries we haven’t even considered yet.

That makes this the right company to buy at the right time … before the AI boom fully takes hold and grows faster than we can keep up.

Adam just opened up his special presentation on this next wave of the AI mega trend.

Make sure you go here now to find out more about this amazing discovery, and see how you can potentially profit from the next phase of the AI mega trend.

Until next time…

Safe trading,

Matt Clark, CMSA®

Chief Research Analyst, Money & Markets

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