Forget Picking the AI Winner. Buy the Shovels.
The geopolitical world has entered a kind of “Groundhog Day.”
A cease-fire was technically declared between the U.S. and Iran in early April. However, since that time, little if any progress has been made in peace proceedings. Instead, the world has entered a kind of doom loop in which President Trump first declares that Iran wants to make a deal “badly” only to then reject whatever deal Iran proposes as “garbage” or “unacceptable.”
Navigating this situation is a nightmare. And the reality is that few people have any real knowledge of what is happening “behind the scenes” in terms of negotiations. So, trying to trade this situation is impossible; you’re having to work with imperfect if not incorrect information, plus the President’s tendency to make dramatic claims.
However, while circumstances surrounding the War in Iran are murky at best, the situation is VERY different when it comes to another major market theme.
I’m talking about the Artificial Intelligence (AI) revolution.
You likely have read a lot of investment research claiming that AI is in a massive bubble and that a crash is coming.
These claims may be true… but it is not coming anytime soon.
Consider…
The MAG-7 just hit new all-time highs after correcting 10% earlier this year. This is NOT bearish.
Even Microsoft (MSFT) which has been the worst performing MAG-7 company has held its 200-week moving average and is now in the process of bouncing. If the AI bubble was over… MSFT would have taken out this like it did during the Tech Crash or Great Financial Crisis.
Again, none of this is bearish. Yes, AI might be overhyped. And yes, much of the MAG-7/ hyperscalers’ massive capital expenditures cycle ($600 billion per year) will likely prove to be misallocated.
But in the meantime… the AI bubble is nowhere near over. The market is telling us this in clear terms. And if you’re interested in seeing the largest potential gains from this theme, you need to focus on AI bottlenecks.
Think of it this way… the MAG-7/ hyperscalers are going to spend that $600+ billion per year on the AI buildout no matter what. This means the money is going to be spent on smaller “picks and shovels” companies that produce the items the MAG-7 need for the builtout… even if the buildout proves to be a mistake.
I’m talking about companies like Micron Technology (MU).
MU manufactures High Bandwidth Memory (HBM) — the memory stacks built directly into every AI Graphics Processing Unit (GPU).
AI models have billions of parameters. The GPU needs to fetch them constantly to run. Standard memory can’t deliver data fast enough — the GPU sits idle waiting. HBM solves this by stacking memory dies vertically and placing them millimeters from the compute die, delivering roughly 100x the bandwidth of standard DRAM.
Put simply, MU profits from the AI buildout. Hyperscalers NEED its products. And the markets know it.
MU shares have erupted higher from $50 per share to over $800 per share in the last year. Those investors who ignored the doom and gloom and focused on where money is flowing in this capex cycle have made fortunes.
Another example of an AI-builout play what is benefitting from this capex cycle regardless of whether AI delivers on ite potential is Lumentum (LITE).
Lumentum manufactures critical optical components — lasers, modulators, photodiodes, and full photonic engines — that enable ultra-high-speed data transmission in AI data centers, telecom networks, and advanced electronics.
Here again, the AI-buildout needs LITE… And those investors who allocated capital based on this have seen LITE shares have skyrocketed from $50 per share to over $1,000 per share in the last year.
Investing is all about finding what works. Right now, the AI-buildout is what works. And if you are looking to see outsized gains from the continued AI-buildout, you need to look outside of Big Tech to the “picks and shovels” plays: the companies that will profit from the AI even if the technology doesn’t result in a productivity boom.
On that note, we recently published a special investment report outlining three AI plays Wall Street has yet to understand. The report is title The AI Plays Your Broker Doesn’t Know About and we are making just 99 copies available to the investing public.
To reserve one of the remaining copies…
Best Regards
Graham Summers, MBA
Chief Market Strategist
Phoenix Capital Research