Tech analyst Eric Fry has identified a common pattern in every new technology cycle.
First the innovation itself appears, then, a bottleneck emerges, next, capital floods in to solve the problem, and finally, the regime changes. We are now nearing the regime change phase and Eric's AI “Golden Rivets” are what the smart money is rotating into.
The Teaser
Just like an NFL football game, there's a playbook for exactly this moment.
A former portfolio manager and James Grant disciple, working at Grant's Interest Rate Observer. Eric Fry is best known for his international multi-bagger investments.
We are familiar with Eric's prose, having previously reviewed his AI Survivor Stocks and America's Final Invention Pitch teasers, among others.
Over the past few years, the Magnificent Seven of Nvidia, Microsoft, Alphabet, Amazon, Meta, Apple, and Tesla have handily outperformed the S&P 500 by a factor of nearly 3:1.
But if we think they are still the best place to invest our money, we are mistaken according to Eric.
This is because they have collectively gone from the biggest producers of free cashflow in the world to the biggest capex spenders. The Mag 6, with the sole exception of Apple, is on pace to invest more than $750 billion into artificial intelligence infrastructure this year alone.
It's the largest infrastructure and capital expenditure spree in documented human history and it has one stated goal – artificial general intelligence (AGI).
Unfortunately, it's about to run into the hard wall of physical reality.
I would add that even if the end goal of AGI is achieved. It's going to take years or perhaps decades before a return on the unprecedented amount of investment is seen.
The market hasn't priced this in yet and someone is going to be left holding the bag in the end.
However, going to cash and riding things out isn't an option either in the current inflationary environment. Owning assets is still the best way to preserve and compound our capital.
To this end, Eric says he's found three businesses to rotate into that are generating cashflow like the Mag 7 used to and they could even exceed their performance going forward.
The Pitch
All are revealed in a new report titled “The Speculator's Guide to Profiting Off AI's Golden Rivets.“
It's available only to subscribers of Eric's newest research service curiously called The Speculator.
The cost for the first year is $1,799 ($4,000 annually thereafter) and it comes with a 90-day satisfaction guarantee, meaning a refund in the form of a credit to any other InvestorPlace premium research service within a year.
The Problem of the Golden Rivets
A Darwinian battle for suvival.
This is how Eric describes the current AGI arms race.
For their part, the Mag 7 see it as the only way they can capture a significant share of the lucrative enterprise AI market.
One has to look no further than Amazon's AWS cloud computing service for justification.
It's what single-handedly transformed Amazon from an unprofitable general e-commerce retailer into a profitable tech company. Today, AWS generates more than $120 billion in annual revenue with a profit margin that tops 30%.
The thinking is that the demand for cloud enterprise AI solutions will be even greater, with Google already seeing 82% year-over-year growth in its cloud business. Much of it coming from corporate clients deploying AI.
So the thesis isn't crazy, there is real demand, but there's also a not-so-small problem…
AI's Irreplaceable Inputs
Everything is scaling.
From chips to servers and data centers.
However, there are some fundamental, irreplaceable inputs that cannot scale with them. We're talking about energy, raw materials, and the memory needed to store the data, power it, and build the equipment such as silicon, copper, silver, and rare earths.
These are the “Golden Rivets” that money alone cannot produce.
As an example, the International Energy Agency (IEA), has warned that copper faces a 25% deficit by 2035 due primarily to data center demand.
Bringing a new copper mine online takes more than a decade, on average.
It's much the same story with silver, which is in its sixth consecutive year of structural deficit and rare earths are also facing a supply crunch due to China's grip on the supply chain.
Knowing all this and what capital is flowing into, the play becomes clear: Rotate out of hyperscalers and into the scarce “Golden Rivets” solving the biggest AI bottlenecks.
Eric Fry's “Golden Rivets” Stocks
The only chance we have.
At solving the AI bottleneck and securing above-average returns over the next 3-5 years.
This is what Eric's “Golden Rivets” stocks represent, starting with a raw materials pick that not a single word is said about.
The same goes for the power and memory picks, so what gives?
Eric keeps his primary picks a mystery while offering up a bevy of other companies at the forefront of solving AI bottlenecks to roll the dice on or, at the very least, put on our watchlist.
This is the complete list by category, per the hour-long video presentation.
Raw Materials
- Cameco Corp. (NYSE: CCO)
- Teck Resources (NYSE: TECK)
- Eramet SA (OTC: ERMY)
- Ero Copper (NYSE: ERO)
- Vale SA (NYSE: VALE)
Energy
- Baker Hughes (Nasdaq: BKR)
- Antero Resources (NYSE: AR)
- Range Resources Corp. (NYSE: RRC)
- Oceaneering International Inc. (NYSE: OII)
- Enphase Energy Inc. (Nasdaq: ENPH)
Memory
- Arm Holdings plc (Nasdaq: ARM)
- Teradyne Inc. (Nasdaq: TER)
- ACM Research Inc. (Nasdaq: ACMR)
- PDF Solutions Inc. (Nasdaq: PDFS)
The Next Great Rotation?
Artificial intelligence, infrastructure, and energy.
These three sectors have been the biggest beneficiaries of capital inflows through the first half of the year.
So Eric is right about them being what capital is rotating into. It also tells us that the memory and energy trades are starting to get a bit crowded, with the valuations of prominent names like Teradyne and Enphase, at 52x and 39x earnings respectively, bearing this out.
However, exceptions still abound and plenty of raw material and other names remain undervalued compared to their reserves and peer groups, with the catalysts covered here firmly in place.
This includes Teck Resources, which trades at a considerable discount to it's contained copper reserves of 10.5 million tonnes alone.
Ero Copper, a commercial producer with proven and probable copper reserves of 73,000 thousand tonnes, is also comparitvely underpriced, trading at 12x current earnings. A discount to the global mining sector median of 15-20x.
As a special mention, Oceaneering International from the energy category is an interesting name. It controls roughly half of the global subsea robotics drilling market and it is expanding into defense and aerospace application engineering. The company is valued at 15x current earnings, I just wish it had less debt than its present $822 million load (70% debt/equity).
Overall, I agree with Eric's thesis more than I disagree with it. AI is the real deal, but it will take longer to see a return on investment than many are currently pricing in.
If we remain disciplined, don't chase names that have already had huge run ups and selectively buy into undervalued businesses with catalysts already in place, we'll do better than most.
Quick Recap & Conclusion
- Analyst Eric Fry beleives we are now nearing the regime change phase of the artificial intelligence cycle and a few “Golden Rivets” are what the smart money is rotating into.
- Eric's “Golden Rivets” is code for the fundamental, irreplaceable inputs that AI simply cannot scale without, such as energy, raw materials, and memory.
- Eric has a pick for each respective vertical and they are all revealed in a new report titled “The Speculator's Guide to Profiting Off AI's Golden Rivets.“ A subscription to Eric's newest research service called The Speculator is required, which costs $1,799 for the first year ($4,000 annually after that).
- No clues, hints, suggestions or cryptic codes were provided on any of the three main picks, but we did dig deeper into the 14 watchlist names revealed in the latter part of the presentation.
- Teck Resources (NYSE: TECK) and Ero Copper (NYSE: ERO) stood out for their essential nature, undervaluation, and structural supply/demand imbalance.
When will the mega investment into AI pay off? Leave your best guesses in the comments.