3 Stocks Quietly Leveraging AI While Everyone Chases Nvidia

Key Concepts

• AI Deployment Framework: A structured approach to evaluating how companies integrate Artificial Intelligence into their operations.
• Four Vectors of AI Deployment:
  • Design and Discovery
  • Intelligent Agents
  • Internet of Things (IoT)
  • Capital Efficiency
• Breakthrough Investor Newsletter: A publication focused on identifying companies that are effectively using AI to transform their businesses and create shareholder value.
• Power Gauge: A proprietary tool used to rate stocks, with a focus on bullish or very bullish signals.
• EQ Filter (Earnings Quality Filter): A secondary filter that assesses how well a company converts earnings into cash, aiming to avoid companies with high accruals or low cash conversion.
• Double Bullish Signal: A rare signal generated when a company meets both the Power Gauge's bullish rating and the EQ Filter's criteria.

AI Deployment Framework: The Four Vectors

Joe Austin of Chaken Analytics has developed a framework to evaluate how companies are implementing AI, recognizing that many companies claim to use AI without a clear strategy. This framework consists of four "vectors of deployment":

1. Design and Discovery: This vector focuses on companies using AI for market expansion, new product creation, or personalized advertising to reach new customer segments.
2. Intelligent Agents: This involves AI-powered systems, such as chatbots, that not only respond to customer inquiries but also assist sales and customer service personnel in building stronger customer relationships.
3. Internet of Things (IoT): AI significantly enhances the feedback loop in IoT systems. For example, instead of just detecting high pressure in a pipeline, AI can actively adjust the pressure.
4. Capital Efficiency: This vector centers on cost reduction, particularly in supply chains. It also applies to improving processes like risk underwriting in insurance companies.

Austin notes that across various industries, companies tend to follow common patterns in how they deploy AI, making this framework applicable broadly.

Stock Recommendations and Analysis

Austin presents three companies that exemplify the successful deployment of AI, aligning with his "Breakthrough Investor" philosophy of identifying companies that are using AI to fundamentally change and improve their businesses.

1. Interactive Brokers (IBKR)

• Company Profile: Interactive Brokers is described as a technology company masquerading as a brokerage firm, founded by Hungarian immigrant Thomas Peterffy. It boasts an impressive 86% operating margin, indicating high operational efficiency.
• AI Deployment:
  • Intelligent Agents: The company extensively uses AI to manage its customer processes, making it difficult to reach a human representative. This AI-driven approach handles customer relationships efficiently.
  • Design and Discovery: Interactive Brokers develops advanced technology for its largest clients (hedge funds) and then deploys this technology to its retail customer base, offering them sophisticated tools at a low cost.
  • Data Sets & IBOT: With a vast amount of data from its diverse client base (from large hedge funds to small investors), Interactive Brokers uses this information to train its AI. Their product, IBOT, is a language-driven investment research tool that can generate charts or find companies based on specific criteria (e.g., "Give me a six-year chart of Google sales" or "Find me all companies with a PE of 22"). This is seen as a significant innovation not widely replicated by competitors.
• Financials & Growth: The stock has performed exceptionally well. While its operating margin is already at the top tier, this efficiency allows it to maintain a competitive edge in the cutthroat brokerage business.
• Additional Business: Interactive Brokers is also entering the prediction markets business, leveraging its existing customer base of nearly 4 million users across 38 countries and its established regulatory infrastructure.
• Key Quote: "I say that Interactive Brokers is a tech company masquerading as a brokerage firm because this company has I think an 86% operating margin."

2. Roku (ROKU)

• Company Profile: Roku, a well-known name in streaming devices, is transitioning from primarily selling hardware to focusing on its software as an operating system for smart televisions.
• AI Deployment:
  • Intelligent Agents & Design/Discovery (Content Recommendation): With a presence in 90 million households globally, Roku is using AI to navigate the fragmented streaming market. It acts as a "sherpa" for users, recommending content based on their viewing habits ("if you like that show, you're going to love this show") and avoiding content they disliked. This is compared to the AI models used by Instagram and Google.
• Revenue & Growth: Roku is becoming an advertising company. A recent deal with Amazon grants them access to advertise in approximately 80% of US households. Their advertising business is experiencing rapid growth.
• Financials & Outlook: After several years without profit, Roku has recently become profitable and cash flow positive. The company is also initiating a share repurchase program. The significant audience asset is considered valuable, potentially making Roku an attractive acquisition target.
• Key Statement: "And so what they're doing is they I mentioned they were becoming a software company. given this embedded base of users, they're taking an Instagram approach to helping you find TV content."

3. TE Connectivity (TEL)

• Company Profile: TE Connectivity is described as a seemingly "boring" industrial company that manufactures connectors and specialized plugs used in various electronics, including cars.
• AI Deployment:
  • Internet of Things (IoT): TE Connectivity is a key player in the IoT space, providing the essential connectors for connected devices. The number of IoT devices is growing at approximately 14% annually, with the IoT market itself expanding at about 20% per year.
  • Picks and Shovels Analogy: The company is likened to providing the "picks and shovels" for the IoT gold rush. The rapid refresh cycle and wear-and-tear of IoT devices (e.g., home security systems becoming obsolete in three years, pipeline sensors needing constant reliability) create a continuous demand for their products.
  • Data Centers: TE Connectivity is also a significant supplier for the booming data center industry.
• Impact on Business: While TE Connectivity operates with low margins, AI is driving significant top-line growth. The company has made several acquisitions, and sales growth is accelerating for the first time in years, which is reflected in its stock price.
• Performance: This stock has been the best performer since the launch of the "Breakthrough Investor" newsletter, although it is currently trading above its buy target. Austin indicates he has similar companies in development.
• Key Statement: "And we like T connectivity because it's kind of like the picks and shovels of the internet of things."

The "Breakthrough Investor" Methodology

Joe Austin outlines the methodology behind his "Breakthrough Investor" newsletter, which focuses on identifying high-quality investment opportunities through a dual-filter approach:

1. Power Gauge Filter: The initial screening process involves identifying companies that the Power Gauge rates as "bullish" or "very bullish."
2. EQ Filter (Earnings Quality Filter): This proprietary filter, developed from Austin's background as a short-seller, assesses the quality of a company's earnings. It looks for companies that:
   • Convert a high percentage of their earnings into cash.
   • Have minimal earnings derived from accruals (accounting entries rather than actual cash).
   • Analogy: Austin uses an example of two companies selling an item for $10,000 with a $2,000 profit. If one company receives cash and the other receives a note (a promise to pay), the cash-receiving company has 100% earnings conversion to cash with no accruals, while the note-receiving company has 0% conversion and high accruals. Companies with high accruals are considered weaker.

The combination of these two filters aims to identify a "rare double bullish signal," which Austin finds in approximately 110 out of 4,000 companies reviewed weekly. This rigorous process emphasizes risk management, as Austin recommends stocks as if he were investing his own money.

Conclusion and Call to Action

The discussion highlights how AI is not just a buzzword but a transformative force that can significantly impact established companies, creating new opportunities and value. The "Breakthrough Investor" newsletter and its underlying methodology offer a structured approach to identifying these AI-driven opportunities by focusing on companies that are effectively deploying AI to enhance their operations and financial performance. Viewers are encouraged to scan a QR code or click a link for more information on the "Breakthrough Investor" and the Power Gauge tool to further their own research. The video emphasizes that it is not providing specific financial advice but rather stock ideas for individual due diligence.