How The Westchester Secret Tells Us the Future of A.I.
About an hour’s drive north of the hustle and bustle of Manhattan is a sleepy bucolic landscape in an area known as Yorktown. Small country roads connect homes, firehouses, parks, and nature preserves.
Tucked inside this pastoral setting is a crescent-shaped building with a science-fiction air about it, like something right out of the X-Files. And that’s essentially what it is. This building has been there since the 1950s, and it’s where the past meets the present and the future.
The Thomas J. Watson Research Center is the headquarters of IBM Research, the largest industrial research organization in the world. It has been and is a major gateway to the future – of technology, of humanity, and for our purposes today, of the next phase of the artificial intelligence (A.I.) revolution that exploded onto the scene one year ago.
Many associate IBM with boring old business machines (after the company’s name: International Business Machines), but its history as a technological pioneer is as rich as its future is promising.
It was there in Yorktown that IBM pioneered the path to personal computers in the 1980s. Look how much our world has changed since. Now, 40 years later, this cutting-edge research center is perfecting another breakthrough technology that makes those early computers look like hieroglyphics on a cave wall.
You see, IBM is at the forefront of quantum computing – the next “big thing” in both computing and artificial intelligence. It processes tasks millions of times faster than your average computer.
The IBM Quantum System One is the world’s first circuit-based commercial quantum computer. This is not a computer you leave on the couch. It’s huge, and it sits in an aluminum canister encased in protective glass.
This fortress-like infrastructure is needed because the quantum chip inside must be cooled to temperatures just slightly above absolute zero, which is the temperature at which all molecular motion stops. (That’s 460 degrees below zero on your Fahrenheit thermometer if you’re scoring at home.)
The technological marvel inside the aluminum nests three cylinders with oodles of silver wire loops, looking simultaneously old-school and futuristic and poised to change the way we do everything.
Opening the Door to Transformation
The transformational leap to quantum computing is made possible by qubits – short for “quantum bits.” As advanced as qubits are, the reason they’re so amazing is actually quite simple.
All the computer chips we use today still operate in binary mode: 0s or 1s. They run only one calculation at a time – essentially a “yes” or “no.” But qubits can be a 1, a 0, or any combination of 1 and 0. They can be a “yes,” “no,” or varying degrees of “maybe.”
This is known as “superposition” in both possible values, and it enables the quantum computer to run many scenarios/computations at the same time. It’s like having multiple computers in one, and the quantum algorithms process the information in a fraction of the time it takes current computers.
As someone who developed and wrote a bunch of algorithms for my quantitative analysis stock-picking system, I can tell you that this is both really cool and really incredible.
Imagine what we could do with a computer that’s a few million times more powerful than what our already tech-dependent world is built on. We’re making a leap equivalent to going from the Wright brothers’ first airplane flying at 30 miles per hour to a supersonic jet zooming by at a blazing 1,700 miles per hour.
Speed is more than just convenient. We already download movies in a few seconds, so doing it in a fraction of a second is nice and all, but that doesn’t really change the game. However, setting everything to warp speed and eliminating delays that come with our existing computers opens the door to other transformations.
Slight blips – even delays we don’t see – could make the difference between life and death when it comes to autonomous vehicles reacting to a pedestrian crossing the road. Or a surgeon at the Mayo Clinic in Minnesota robotically operating on a patient in Florida.
What’s more, quantum computing’s processing speed will push artificial intelligence to a whole new level, which is kind of hard to imagine. The world is still getting a handle on A.I. and companies are scrambling to incorporate it everywhere, but quantum computing is about to kick A.I.’s already mindboggling abilities into hyperdrive.
The Convergence Is Coming
Unless you’ve been on a secret mission to Mars, you’ve been inundated with all things A.I. since ChatGPT burst onto the scene.
It’s all over the news. Companies are touting their emerging capabilities at every opportunity, and A.I.-related stocks have soared higher.
At one point earlier this year, French financial company SocGen reported that the “A.I. frenzy accounts for ALL of the S&P 500’s gain in 2023.”
To quote the late-night infomercials… But wait, there’s more!
While A.I. is absolutely cutting edge, it is only one leg of a three-legged stool, transforming information and communication in our digital world. Understanding this helps us find some of the most exciting long-term investment opportunities.
Three breakthrough technologies are converging, and all three are essential to where we go from here. They are:
- Artificial Intelligence
- Quantum Computing
- NextGen Networking
We can think of these three technologies in the context of human beings. We have three essential components – mind, brain, and body.
The mind is our software; our operating system that brings everything together. It’s our “real” intelligence that allows us to think, feel, and process the world around us.
The brain is our hardware; the computer’s central processing unit. It powers the mind and controls bodily processes.
The body allows us to do all those things our mind and brain tell us to, like walk, run, see, talk, and hear. And most importantly, to network and communicate with the world around us.
We need all three – to borrow a phrase from the U.S. Army – to “be all that we can be.”
Now think of a new technological “life.” It also needs an operating system – the A.I. component. Like software on a computer, it will analyze, calculate, decide, design, and perform other “thinking” skills associated with mere mortal intelligence. And like any good software, it will be constantly updated and improved far into the future.
Then we need the machine itself – the quantum computer. It’s like the brain, only this brain works millions of times faster than anything we’ve seen so far.
Finally, we need the body. But the first quantum computers will be highly valuable, guarded in ivory towers not unlike what we see with the System One. They won’t be available to you and me for quite some time.
So how will anyone use them?
Hardware as a Service – or HaaS.
You’ve probably heard of Software as a Service (SaaS). It’s a hugely popular business model in which companies “rent” their software to users who connect over the internet. Think of popular cloud applications like Dropbox or iCloud.
Successful SaaS companies have made investors a ton of money. Microsoft (MSFT) and Adobe (ADBE) both soared 900% in the last decade.
Microsoft does this with its artificial intelligence cloud software, AI Copilot, which my research firm has experience with. Businesses pay a usage fee to access Copilot to enhance their applications with AI.
I expect quantum computing will build on this already successful “as a service” business model until the technology becomes cheaper and more ubiquitous.
ANET: The Networking Powerhouse
AI will never reach its full staggering potential without maximizing processing speeds. That’s why it and quantum computing converge so nicely.
But there’s one more leg of the stool necessary to keep it from tipping over. You can’t have A.I. software leveraging quantum hardware without the two being able to talk to each other. We need reliable light-speed communication all over the world to unlock the full potential of both.
Enter next-generation networking.
Having a light-speed brain processing the most intelligent “software” ever is cool, but without networking, the two remain isolated and independent.
Existing networks are evolving, but I am most excited about one particular corner of the networking world. And Arista Networks (ANET) is the best investment to profit from the proliferation of A.I. and quantum computing.
As these technologies grow and develop, we can make big money in the suppliers – just like during the Gold Rush of the 1890s. Smart businesspeople who sold “picks and shovels” to the miners trying to hit it big were virtually guaranteed to get richer whether the prospectors struck it big or not.
The smart picks-and-shovels approach right now takes us to the industries that stand to make money whether quantum computing explodes quickly or takes a bit more time. To me, the top industry is networking equipment that will facilitate the convergence of artificial intelligence and quantum computing.
As A.I. proliferates and quantum computing becomes increasingly part of the conversation, the need for networked data centers, bandwidth, and smart networking capabilities will increase dramatically.
Arista offers network switches that enhance the communication speeds of servers. Computer servers are the way of the world, and they power our cloud-driven life in data centers. Cloud computing is a scaled model – meaning that as demand surges, computing power rises to meet higher demand.
Arista’s biggest customers are Microsoft and Meta, and both companies’ ambitions rely on the best networking speeds in the business. Last year, the two companies accounted for 41% of Arista’s sales.
In fact, ANET benefitted last year as Meta’s Facebook and other tech giants spent more on data centers. Revenue rocketed 48% in 2022 and is expected to grow 31% this year and 11% next year.
And that’s before the A.I. revenue boost really kicks in. Management said the company probably won’t see a meaningful bump in A.I. revenue next year, but it’s coming. That gives Arista a killer roadmap for its future.
Arista has already laid out its strategy to be a significant supplier in generative A.I. networking infrastructure. The company plans to be a major player in the networking support required for the exploding A.I. revolution.
Next year should bring pilot programs for early-stage implementation, and in 2025 the company expects “large cluster deployments.” In other words – a lot of sales.
That’s why ANET is so appealing right now. It has a known catalyst coming to build on an already strong business that’s making ethernet devices for computer networks. Even without the coming A.I. boom, Arista has taken market share away from one-time networking king Cisco for the last five years.
Firing On All Cylinders
I designed an entire system to identify the best stocks in the market with the highest odds of making big money. Based on more than 30 years of data, the stocks we buy have a 70% chance of bringing us profits. That means more winners than losers, and winners that are typically much bigger than losers.
My system pulls more than a million data points each day and runs algorithms analyzing more than 30 factors to screen for the best of the best – stocks with outstanding fundamentals (a growing business), strong technicals (stock price action), and institutional support (Big Money flowing in).
Arista Networks scores on all fronts, which is reflected in the outstanding overall Quantum Score of 87.9. The optimum range in which to buy a stock is between 70 and 90, so we couldn’t ask for much better.
Within that Quantum Score, I assign fundamental and technical rankings. We always want to own the absolute best businesses, and ANET’s Fundamental Score of 87.5 puts it in the top 10 of more than 6,000 stocks my system currently rates.
The company sports excellent sales growth (48.6% over the past year), and as we talked about above, A.I. should provide a big boost. Earnings growth is also strong at 59.6% in 2022 with expectations for another 43% pop this year.
ANET keeps 31 cents of every dollar it brings in, giving it an outstanding profit margin of 30.9%. And it has virtually no debt weighing it down or needing to be paid.
The Technical Score of 88.24 is also excellent. We actually don’t want a “perfect” score of 100. That works on tests in school, but with a stock, there’s nowhere to go but down.
That 88.2 is a nice entry point and still a great ranking that reflects the stock’s nearly 65% gain in the past 12 months, and its 3X gain over three years.
And yes, there is more to come. We’ve talked about Arista’s growth prospects and the AI/QC catalyst. The other thing to know is that great stocks tend to stay great stocks. New highs lead to more new highs.
Part of that is Big Money continuing to pour in, and it has consistently flowed into ANET over the past 12 months. All those green bars below – 18 in total – are Big Money buy signals, including three just recently. Those two lonely red bars are the only sell signals, and both marked bottoms.
ANET is also an “outlier” in my system, meaning it has appeared on my system’s elite Top 20 list at least 20 times. These are the top stocks in the market. Being one of the top 20 stocks out of more than 6,000 analyzed puts it in the elite 0.3% at the time.
ANET has shown up on the Top 20 list 65 times in the last nine years, surging 855% in that time. It’s been stronger than usual over the past year, appearing 12 times.
Action To Take
Buy: Arista Networks (ANET)
Quantum Score: 81.0/100
Buy-up-to Price: $220.62
Protective Stop: $151.63
Arista Networks gives us the powerful one-two punch of a great stock to buy both right now and for the coming months and years. I have recommended this stock even without the coming A.I./quantum computing revenue boost, but that only supercharges our profit potential over the long term.
We should also get a nice tailwind from a stronger market. Regular readers know that my proprietary Big Money Index (BMI) recently fell to “oversold” after a painful three months. Oversold sounds bad, and getting there is definitely no fun, but it’s also one of the most reliable bullish indicators I’ve ever seen.
The BMI was developed at my research firm, MAPsignals. It has triggered oversold 24 previous times since 1990 – about once a year – and 75% of those times the S&P 500 was positive three, six, and 12 months later. And not only positive but with much stronger than average returns.
We’re also in the strongest time of the year for stocks, and recent data is highly bullish. The Federal Reserve looks to be done raising interest rates, bond yields that have weighed on stocks are falling, and corporate earnings continue to beat expectations.
I’m starting to hear more talk of rate cuts in 2024. Falling rates are good growth stocks, specifically technology stocks. ANET has a potentially perfect tailwind to launch it into an even higher growth mode.
Buy or add to ANET positions, up to $220.62. We will set our initial Risk Point at the TradeSmith VQ trailing stop price of $151.63.
I look forward to bringing you more opportunities in stocks like ANET. Stocks that are already among the strongest in the market and still have huge long-term potential as they operate in transformational trends changing our world.
Talk soon,
Jason Bodner
Editor, TradeSmith Investment Report