The AI Crash Is Coming — Here Are 3 Stocks to Buy Now

Key Concepts

• Economic Moat: A sustainable competitive advantage that allows a company to protect its long-term profits and market share from competitors.
• Investment Cycles: The recurring patterns of expansion and contraction in financial markets.
• Credit Cycles: The availability and cost of credit, which significantly impacts economic activity and investment.
• Return on Assets (ROA): A profitability ratio that measures how efficiently a company uses its assets to generate earnings.
• Scale Distributor: A business that benefits from economies of scale due to its large size and broad reach.
• Process Know-how: A competitive advantage derived from specialized knowledge and expertise in a particular operational process.
• Operating Scale Business: A business where larger scale leads to lower costs and a competitive advantage.
• Intellectual Property (IP): Legal rights granted to creators and owners of original works of authorship, inventions, or designs.
• Uniform Accounting: A proprietary accounting methodology that aims to provide a more accurate and comparable view of a company's financial performance by adjusting for accounting distortions.
• AI Bubble: A speculative market phenomenon where the valuations of Artificial Intelligence-related companies become excessively inflated, detached from their underlying fundamentals.

AI Bubble Debate and Investment Strategy

The discussion begins by addressing the prevalent question of whether the current market is experiencing an "AI bubble." Rob Spivey of Altimetry Research suggests that if everyone is asking if it's a bubble, it likely isn't one yet. He points to data on investment and credit cycles indicating a healthy market environment with room for further growth.

However, Spivey emphasizes that the existence of an AI bubble is largely irrelevant for individual investment strategies. The core focus should be on identifying companies with strong economic moats – sustainable competitive advantages that allow them to preserve their market share and profitability over the long term. This approach, based on 25 years of uniform cleaned-up data, aims to diagnose these competitive advantages, understand their strength, reinvestment potential, and duration. By focusing on moats, investors can build a portfolio resilient to any market cycle, including AI booms or busts.

Companies with Strong Economic Moats

1. United Rentals

• Business Model: United Rentals is a scale distributor that rents equipment. While seemingly a "boring" business, its strength lies in its broad relationships with both equipment suppliers and customers.
• Economic Moat: Its moat is built on scale and network effects. As United Rentals opens new locations, it leverages its existing relationships to acquire equipment more efficiently and attract more customers. This leads to a continuous rise in Return on Assets (ROA).
• Key Metrics & Growth: Over the last decade, United Rentals has increased its market share from 10% to 15%, with its ROA consistently rising. The company has experienced a 5,000% ROA compounding over the past 20 years and is projected to achieve similar growth.
• AI Exposure: While benefiting from increased equipment demand due to AI-driven manufacturing, its fundamental strength ensures resilience regardless of AI market fluctuations.
• Analogy: The discussion draws a parallel to Nvidia, which transformed from a chip manufacturer to a platform company (Kudo) with a strong competitive advantage, leading to its massive valuation growth. This illustrates how even large companies can expand significantly with a robust moat.

2. Baker Hughes

• Business Model: Baker Hughes is an oil and gas equipment and service company.
• Economic Moat: Its moat is based on process know-how. This refers to a deep, specialized competency in a narrow area that would take competitors years or decades to replicate. Baker Hughes excels in helping oil majors and national oil companies with complex drilling and optimization processes.
• Key Metrics & Growth: The company has built a core competency that few others (like Halliburton and Schlumberger) can match. This reinforces its competitive advantage, leading to rising ROA. The market currently undervalues Baker Hughes, pricing in profitability declines, while Altimetry Research expects continued moat building and ROA growth, making the stock appear cheap.
• Cyclicality: While exposed to the energy sector's cyclicality, the long-term compounding of its competitive advantage is expected to provide stability for investors holding for 10-15 years. The strategy involves building a portfolio of companies with such advantages to ensure overall portfolio growth through cycles.

Company to Avoid: Oracle

• Business Model Shift: Oracle, historically known for its Enterprise Resource Planning (ERP) software (like PeopleSoft), where switching costs are extremely high, is shifting its focus.
• New Business Area: Oracle is now building data centers for OpenAI, which is classified as an operating scale business.
• Economic Moat Weakness: Operating scale businesses, while benefiting from lower costs at larger scales, generally have structurally lower ROA and less durable competitive advantages compared to businesses with high switching costs or strong IP.
• Financial Impact: This strategic shift has led to a steady decline in Oracle's ROA over the past few years, despite its significant market capitalization ($700 billion).
• Investment Perspective: While Oracle's stock has seen short-term gains (e.g., a 40% jump in one day), Altimetry Research advises against owning Oracle stock for the next two to three years, anticipating that the market will eventually recognize the structural disadvantages of its new business direction. The narrative of winning contracts is seen as a distraction from the underlying fundamental shift to a lower-return business model.

The AI "Boom" vs. "Bubble"

Spivey reiterates that the current AI market is a boom, not a bubble.

• Valuations: Major AI players like Alphabet, Microsoft, Meta, and Amazon have reasonable Price-to-Earnings (P/E) ratios, especially considering their earnings growth.
• Financing: Unlike the dot-com bust, where companies relied heavily on debt, the leading AI companies (the "Mega 7") are cash-rich. They generated over $350 billion in operating earnings last year and are reinvesting a significant portion ($300-$350 billion) into growth, which they can fully finance internally.
• Commoditization of AI Services: While specific AI services like ChatGPT might become commodities due to competition from Gemini, Grock, and Claude, the underlying companies powering the market have sound valuations.
• Private Companies: Valuations for private AI companies like OpenAI might be getting high, but these are not accessible to most public investors.

Tesla's Future Growth Potential

• Focus on Robotics: Altimetry Research's special report on Tesla highlights the company's significant growth potential driven by its focus on robotics, specifically the Optimus humanoid robot.
• Shift from Automaker: This strategic pivot moves Tesla beyond being just an automaker (an operating scale business with limited IP differentiation in cars) towards becoming a leader in robotics.
• Intellectual Property (IP) as a Moat: Robotics offers substantial opportunities for Tesla to develop and leverage intellectual property, which represents a higher-return competitive moat.
• Elon Musk's Drive: Elon Musk's strong commitment and "force of will" are seen as critical factors in making this robotics vision a reality.
• Synergistic Growth: The report identifies other companies that are expected to grow alongside Tesla due to this robotics focus.

Conclusion and Investor Takeaway

The central theme is the importance of identifying and investing in companies with durable economic moats. This fundamental analysis allows investors to navigate market cycles, including the current AI boom, with confidence. By focusing on competitive advantages rather than short-term narratives or speculative trends, investors can build portfolios designed for long-term compounding and resilience. The discussion highlights specific examples of strong moats (United Rentals, Baker Hughes) and a company whose strategic shift weakens its moat (Oracle), offering actionable insights for investors. The AI market is characterized as a boom, supported by strong fundamentals of leading companies, rather than an unsustainable bubble. Tesla's future growth is tied to its ambitious robotics initiatives, which could establish a powerful IP-driven moat.