AI Arms Race with China: Deep Learning and Investing

Are you an investor in Chinese technology stocks? Then you know it's been a tough year to stay invested.

Besides the trade and intellectual property battles with the U.S., there's the prospect of slowing growth in the world's second-largest economy.

There is also the potential for a credit crisis as the great wall of "shadow banking" showed some cracks recently with the collapse of a peer-to-peer lending platform.

But I try to look longer-term at what extraordinary Chinese companies are doing -- in the largest middle class on the planet --that model the success of great U.S. companies like AmazonAMZN and AlphabetGOOGL .

The best two examples there would be AlibabaBABA , the "Amazon of China," and BaiduBIDU , the "Google of China."

In the video that accompanies this article, I show the price charts of these two important companies. More importantly, I take a look at what is driving their business growth, or lack thereof in the case of Baidu losing digital advertising share to Alibaba.

Then I step back and look at the broader economic trends that are being influenced by Artificial Intelligence (AI) technologies that will make both of these companies long-term winners.

I just completed a special report for Zacks Confidential on these topics and I share some of the market stats for AI's economic impact.

Here are some excerpts...

Artificial Intelligence: Investing in Life 3.0

An explosion of machine and super-computing intelligence is upon us and investors need to learn, think, and move fast!

When I think about writing a Zacks Confidential, I tend to gravitate toward investing themes and megatrends that will help you make money over the next 5-10 years. That means you should be able to read the piece 2-3 years from now and still find value both in knowledge and investing ideas. (So make sure you take full advantage of your subscription and peruse the archives!)

My last 3 reports this year were focused on Healthcare, most recently with "CRISPR Science & Investing" in April and "Winners & Losers at ASCO" in June.

This week, we're going full-tilt into the brave new worlds of AI and automation. In your June of 2016 Confidential titled "Big Economic Disruption: Big Data, AI, and Robotics," I recommended buying Amazon, Microsoft, Google, and IBM to capitalize on those long-term trends -- which are predicted to wipe out over half of human jobs in the next two decades.

The first 2 have been fantastic investments since then with both AMZN and MSFT more than doubling from $750 and $50, respectively. And while Google was also a great pick, gaining over 65% from $750, IBM has gone nowhere.

I realized by late 2016 that IBM's key partner in AI, NVIDIANVDA , would have been the better pick.

Fast forward two years and what does the AI landscape look like as it infiltrates every industry from manufacturing, automotive, and energy to finance, retail, and medicine?

Current forecasts will help us see the growth...

IBM has been talking about the "cognitive revolution" being worth $2 trillion by 2025. But let's break it down a bit:

  • Cloud/Datacenter capex: $41B in 2017 to $108B in 2021 for 27.4% CAGR (per Micron)
  • Cloud/Datacenter total revenues: 3X to $325B in 2022 (per KeyBanc research)
  • Augmented Reality (AR): $5B revs in 2016 to $160B in 2020 for 138% CAGR (per BofA/ML research)
  • Smart Cities: $1.5 Trillion market in 2020 (per Frost & Sullivan research, see graphic in video)

Life 3.0: Being Human in the Age of Artificial Intelligence

That is the title of the 2017 book by MIT physicist Max Tegmark. He begins the book with a sci-fi tale intended to get you thinking. A group of computer scientists called the Omega team decide to build a super AI machine that can learn everything humans do.

In my recent podcast/article, Facebook Faceplant: First Large-Scale AI Fail , I share a few paragraphs that describe Prometheus and its creators' first goal of using Amazon's Mechanical Turk, or MTurk, to make money performing thousands of Human Intelligence Task (HITs) every day. Within weeks, the computer was earning over $1 million per day.

Then, they went on to teach Prometheus to make TV shows, movies, commercials, news, and eventually, political candidates .

Prometheus became a global cultural and political machinery that eventually achieved the goal of every AI that breaks out: world domination.

Tegmark tells this tale to make the point that AI's power is both unprecedented and unpredictable. And it's up to us to understand and embrace its potential so that we might have some control over its direction, velocity, and desired goals.

Tegmark wants more of us to be ambitious about what kind of world we could create with AI. Because the alternative -- thinking it is inevitable and out of our control -- leads to a complacency that won't be ready for the future it creates.

(end of Zacks Confidential special report excerpts)

If you want a copy of that report, just email and tell 'em Cooker sent you.

And be sure to watch today's video where I also make the larger point that whether or not you view China as a competitive threat -- in technology, military strength, and space exploration -- many young people today from both countries view us more as partners.

The greatest evidence of this is in new technologies like AI, biotechnology, Blockchain, and cryptocurrencies where tens of thousands of Millennial scientists, engineers, and "hackers" think globally and seek to create decentralized economic, scientific,educational, and entertainment platforms ruled by open-source code.

As always, the future is coming at you fast. And it's always time to learn, adapt, and invest in yourself and tomorrow's youthful technology.

Disclosure: I own shares of NVDA and BABA for the Zacks TAZR Trader portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators services. Click Follow Author above to receive his latest stock research and macro analysis and get a quick rundown on his Tech Super Cycle thesis in this video/article link.

The Hottest Tech Mega-Trend of All

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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