Lots of readers have been chiming in with questions about the latest Luke Lango pitch for his “SUPRMAN” stocks for the tech melt-up, and I don’t have any other big portfolio moves or updates to share at the moment, so today I’m focusing my Friday File on trying to answer some of those questions…

The pitch was made in a “presentation” ad for Early Stage Investor ($1,799/yr, no refunds) on Tuesday evening… it’s mostly about AI enthusiasm turning into a tech “melt up” that looks a lot like the dot-com boom of the late 1990s, as Luke Lango argues that most of the big “melt ups” the market has had have followed moments when the Federal Reserve “paused” in its work of raising interest rates… and that this one, just like the Fed pause in 1995, happens to also coincide with the rise of a new technology theme that will change the economy and ignite investor interest (“the internet” in the 1990s, “AI” today).

So Lango points to ‘as soon as June 14’ as the likely beginning of the next melt up, since that’s when the Fed will announce its next interest rate decision. He didn’t make a transcript of this presentation available, sadly, so I’ll mostly be paraphrasing from his statements, but this is roughly what he said:

“A major pivot is coming to the US stock market because of two events — the first is the Fed “pausing” interest rates. Each time that happened, it spurred a rally… including the one in February of 1995. Things will jump into hyperspeed the moment the Fed pauses.

“The other thing is the big change in technology, the launch of AI is like the launch of the internet in the 1990s.”

So the argument is that we’re just about to start a long period (several years) of wild gains in tech stocks, mostly those who benefit from AI in some way, much like the late 1990s brought a long run for tech stocks that were associated with the mass adoption of the internet. There’s a certain plausible logic there, though we should note that the starting point is a bit different… some of the most popular names in this area, like NVIDIA (NVDA), are already trading at the valuations we saw for similar market-leading tech names in 2000, at the peak of the bubble, not the valuations those stocks carried in 1995, when that bull market in tech stocks was just beginning to form. At the very least, you’ll probably have to start with something much smaller than NVIDIA, or much less richly valued, if you want to daydream about 1,000% returns in an echo of the dot com boom years of 1998-2000.

So to Lango’s credit, given current valuations, he says that just buying the big tech stocks, the ones who dominate the Nasdaq 100 ETF (QQQ), won’t be the way to win big — the FANG stocks who have led the market recently won’t be the big winners, it will be a new group of stocks that take their place. That’s probably true — I love NVIDIA, and maybe they’ll be the exception over the longer term, but the only semiconductor stock that has come remotely close to this kind of valuation in the past was Intel (INTC) at its peak in 2000, and you don’t want to bet too much of your portfolio on “this time gravity won’t show up” (if you bought Intel at it’s peak valuation in 2000, the value of your holding dropped 80% within two years, and you had to wait at least a dozen more years to “catch up” and start showing a profit for your INTC shares). I don’t know if NVIDIA has peaked for this particular hype cycle, and I haven’t sold my remaining shares, but at this valuation the probability is that returns for NVIDIA shareholders in the next decade will be below average… and while I think firms like Alphabet and Microsoft are well-positioned for a growing AI business, they’re also gigantic companies, it’s hard to beat the market for long when you are the market. They may well be strong investments for a long time, but you’ll have to look elsewhere if you want 1,000% potential from here in the next five years.

He mentions a few well-known investors who are positioned for this “melt up”….

“… even Warren Buffett has moved 39% of his portfolio, that’s $126 billion”

Which is wildly misleading, of course — that’s just a reference to Berkshire Hathaway’s (BRK-B) large stake in Apple (AAPL), which they’ve held (and sometimes grown) for several years now. Maybe AI is part of Buffett’s thinking in holding on to the stock, or maybe he’s imagining a melt-up, but I really doubt it, that’s not how he thinks… Buffett is holding Apple because it’s got the best, stickiest and most addictive consumer product in the world in the iPhone, and is run well, with consistent profitability and plenty of both buybacks and dividends.

But what are the stocks Lango thinks we should buy? He says he has “7 plays that could be the biggest winners coming out of this event” (that event being the Fed’s “pause” announcement), and that these “top tech stocks of tomorrow” are going to be companies that most people have never heard of.

And he has to have a catch acronym, of course, so he calls these the “SUPRMAN” stocks — not so different from the FANG stocks (I think that one was coined by Jim Cramer), or Lango’s past STARS acronym for the winners of the tech boom a few years ago (that was Shopify (SHOP), The Trade Desk (TTD), Adobe (ADBE), Roku (ROKU) and Square (now Block, still ticker SQ). Not so different than the Motley Fool’s FAZER stocks from pre-pandemic days, everyone’s looking for a cool-sounding acronym (the Fool picks were Fastly (FSLY), Appian (APPN), Zoom Video (ZM), Elastic (ESTC) and Roku (ROKU), in case you’re curious).

There are a bunch of big-picture predictions made by Lango, including “I believe AI will cure every known disease by 2030,” “I believe AI systems will replace 20% of the current labor market by 2027,” and “It will also permanently kill inflation… robots and software will work around the clock, demand will never outpace supply again.”

He specifically mentions a University of Toronto research project that discovered a potential cure for liver cancer in 30 days, dramatically cutting down the “drug discovery” timeline, and that’s been a big talking point for several years in the biotech world — the potential for AI to speed up the initial discovery of drugs, and possibly to make it easier to settle on safer compounds at an earlier stage of research. That particular project mostly used tools that aren’t really “pure play” investable — the AlphaFold system from DeepMind, which is owned by Alphabet (GOOG), and some programs from Insilico, which is private.

Which highlights one of the challenges of investing in an AI-fueled “tech melt up”, assuming that such a market phenomenon continues to evolve: There aren’t many real “pure play” companies that are leaders in these areas, most AI research is being done either within very large companies or in academic labs, or in the venture-funded companies that are currently sucking in hundreds of millions of dollars in funding from VC firms.

And when it comes to his inflation claim, that’s a bold way of putting it… though it’s true that technology and automation are, almost by definition, deflationary forces. Whether they’re strong enough to make up for the past massive stimulation the economy has gotten from the government, or the inflationary impact of re-shoring and rolling back globalization, assuming that happens as people believe, is an open question.

But then what do we get for clues? What are those SUPRMAN picks? We get actual clues for only three of them, so we can be definitive about those, but we’ll have to guess on the rest… we’ll go through them in order:

“SUPRMAN Stock 1: The King of Warehouse Automation”

Lango talks about the cost differential between US and Chinese warehouse workers ($20/hr vs. $4/hr), and about how necessary cost savings to make up for that will be driven by robotics…. he says that “Amazon believes it can completely automate all warehouses by 2029,” and that “Walmart is doing the same thing.”

He goes on…

“I believe I’ve discovered a company that is ‘the king of warehouse automation’ … created an end to end warehouse automation system that is actively running across the country today.

“Proprietary software, protected by over 250 patents

“Last summer, Walmart signed a deal to automate its distribution warehouses with this technology, and just a few months ago they dramatically expanded the initial partnership to all of Walmart’s 42 regional distribution centers in America by 2030.

“Largest wholesale grocer is also using this AI

“Second-largest supermarket chain has already jumped onboard, too.

“Massive order backlog of over $12 billion today.

“Could more than double by the end of the year, and rise 1,000% long term.”

That one is clearly Symbotic (SYM), which we covered yesterday — it’s also his “#1 AI Stock to Buy Right Now” in ads for his entry-level Innovation Investor newsletter. The valuation is pretty challenging after their recent run, and part of that is almost certainly AI hype that could fade, but they do have real revenue growth, partly fueled by outsourcing their robot manufacturing to get warehouse installations done more quickly, and they’ve got that keystone Walmart relationship, as well as a good connection to the private behemoth C&S Wholesale Grocers, which is a huge distributor of produce (Symbotic founder Rick Cohen is also the Executive Chair of C&S, he’s the son of late founder Leonard Cohen). I guess we might find out how gentle those robots are with our bananas and strawberries before too long.

I picked up some call options on Symbotic yesterday — I hesitate to commit a meaningful amount of capital to this one, given the rich valuation, but the growth has been phenomenal and they are on track to be profitable very soon, with a pretty clear path to scaling that profitability as more of their revenue begins to come from their software platform that manages the automated warehouse than from selling the robots themselves (that will take a long time, but the path is pretty clear, as long as they can retain their customers and keep the installations smoothly growing). Check out yesterday’s piece if you want more detail on that one.

“SUPRMAN Stock 2: The Microsoft of AI

“This could be the best data analytics firm in the world

“Built a better mousetrap in the data space using their AI

“Earliest splash was helping to find Osama Bin Laden, and this year it began to work with Ukraine.

“Developed the gold standard in data analytics for the intelligence community, and now it’s expanding into corporate America.

“80%+ gross margin

“Teamed up with legendary venture capitalist Peter Thiel and hedge fund manager Steve Cohen

“You could pick it up for less than $10 right now”

That can really only be Palantir (PLTR), so I guess we’re not going in acronym order here, we’ve skipped to P. And no, it’s not $10 anymore, it got the AI hype-boost quite recently, so the shares got up to $15 or so this week. It was at $10 a few weeks ago, so perhaps it took a while to put the script for this show together.

(For some context, perhaps that means he envisions Symbotic, which is now around $40, “doubling” by the end of the year, but doubling from prices of a week or two ago, so doubling from $25-30, not necessarily from the current price… though I guess if we have a real “melt up” in tech stocks and it gets near a 1,000% return, as many stocks did in the late 1990s, that could be a rounding error. Not the kind of thing I’d ever want to count on, and one of the hardest things to deal with is figuring out when to sell during a wild “melt up,” but there you have it.)

Dylan Jovine has been teasing Palantir as Ukraine’s Secret Weapon over the past few months — I was noticing that Palantir started to get more interesting back in March and April, as I wrote a couple times, but I sadly never quite pulled the trigger on picking up a small position of that one when it was in the sub-$10 range, before the AI hype washed onto the shores of PLTR. It’s still a rational play if you think of AI as being more of a “who’s the best at data science and analytics” business than it is about “who’s got the coolest generative AI project to draw pictures or write essays”, and the valuation is still perhaps justifiable, even though the business to some degree is a black box.

It’s not cheap, for sure, so to buy Palantir at $15 you’d probably have to have a vision of them improving margins more quickly than analysts are predicting (at the moment they’re valued at about 70X adjusted 2023 earnings forecasts, and still at 45X 2025 adjusted earnings forecasts — that’s on roughly 25% earnings growth), and their revenue is coming in a lot lower than had been expected a couple years ago, so this is probably a name where the Wall Street analysts are a bit leery of looking stupid, which will probably make them more conservative than they typically are… but Palantir does have the inside track on a lot of Fortune 500-size customers, as well as the US Defense establishment, and a bigger push to spend on AI by those organizations would very likely lead to larger Palantir contracts and some upside surprises.

PLTR is still one of the more popular stocks among individual investors, so that may not be one you need to hear about from me… but I’ll keep an eye on it, just can’t talk myself into getting involved at this price. I can’t really justify PLTR unless it’s down in the $10-12 range, but the stock has certainly proven that it can ride a nice strong hype cycle in the past… if you’re betting on that, then remember to have some idea about when you’ll jump off.

Next?

“SUPRMAN Stock 3: The AI Version of Adobe”

Lango describes this one…

“Digital media with immersive 3D experiences. The next-gen version of Adobe, but in 3D. Right now is the perfect time to buy, similar to my last pick. Before the tech crash last year, this stock traded near $200, but right now you can pick it up more than 85% from its highs….

“Sequoia Capital has invested hundreds of millions into this company”

That one has be Unity Software (U), which I suppose is similar to Adobe (ADBE) in that it’s also a toolmaker for creative professionals — Unity provides the engine and design software for 3D immersive video, including filmed entertainment and animation as well as video games and marketing materials.

I bought Unity right around the IPO, near $70, and have been resolved to remain patient with the stock — I love companies that can build a large platform around a proprietary technology, like Unity’s real-time 3D platform for gaming and immersive video, especially if they also have a scalable business for profiting from the work of people who use the platform, like Unity does with their monetization business for game developers (which is largely ad-driven). They’ve shot themselves in the foot a couple times, in their short life as a public company, and they talk more about being a delightful place to work and a world-changing organization than about becoming a profitable enterprise, so it’s been a little tough to be patient at times, but their technology is pretty amazing — there are only three really high-profile development programs available outside of the major gaming studios, as I understand it (the others are the Unreal Engine at Epic Games and the Roblox platform), so it’s a pretty rare “pure play” on the idea that gaming and entertainment and marketing are all going to become more 3D, more immersive, and real-time reactive to users.

Unity is not really directly an “AI stock” in the public consciousness, though I guess it could become one — Adobe is certainly pioneering generative AI within photoshop, and Unity has AI tools that are growing in use, but it hasn’t really caught fire as an AI “story” for investors yet. The real driver for Unity this week was the introduction of the Apple Vision Pro augmented reality headset, which won’t be available until next year, and won’t be a mass-market product right away, but does give Unity a new platform for its technology, and will probably lead to more developers using Unity’s products to develop AR games and applications for Apple (Apple mentioned that Unity’s system will be compatible with the Vision Pro, which got investors excited and drove the stock up 20% or so on Monday afternoon, during the Apple event… it has since calmed down a little).

Unity screwed up their monetization platform last year, what they now call Grow Solutions, by corrupting the data and having to rebuild it and also rebuild investor confidence. That put a pause on their march to profitability, and means they’re reporting odd pro forma growth numbers this year, but they do appear to be back on track now.

Here’s what they said about AI in their last quarterly shareholder letter:

“Our expectation is that AI will be accretive to both our growth and profitability as we embed these technologies throughout the company. We believe that Unity is well-positioned to benefit from AI given four structural and sustainable competitive advantages: the Unity Editor, the Unity runtime, the Unity Network, and our Data Advantage.”

And here’s what they said about their financial guidance:

“For the year, we are taking into account our stronger than expected first quarter and the ongoing uncertain economic environment. We are increasing the low-end of our revenue guide by $30 million and the low-end of our adjusted EBITDA guide by $20 million. Our revenue guide is $2.08 to $2.2 billion, an increase of 50% to 58% year-over year and 3% to 9% on a pro-forma basis, and our adjusted EBITDA guide is $250 to $300M. We remain committed to our goal to reach $1B adjusted EBITDA run-rate by the end of 2024.”

It is hard to be comfortable with “adjusted” numbers with Unity, because the adjustment is mostly for their profligate stock-based compensation habits (they had $1.57 billion in revenue over the past four quarters, and fully 40% of that, $600 million, went to stock-based compensation). Still, they have plenty of cash, they continue to invest heavily in making their platform attractive to developers, and they do have good scalability if they’ve really rebuilt their monetization business, as seems to be the case. They do have that potential to be a consensus tool for 3D developers as that business grows dramatically bigger, which could give them the potential to be that “next Adobe,” though they do not have a monopoly on 3D video, and there’s plenty of uncertainty in that forecast.

If we assume that they’ll reach that $1b EBITDA number at the end of next year (probably more like $300 million this year), then I think it’s pretty rational to think we ought to be able to justify a valuation of 20X EBITDA for a leading platform that has steadily improving economics at that time, so that would be about $20 billion in 18 months. Adjust that for the fact that they’ll probably increase the share count by about 8% during that time with stock-based compensation, as is pretty typical for an 18-month period for Unity, and we can guess that they’ll have about 409 million shares outstanding at that point. $20 billion dividend by 409 million is $49 — if you want to “discount” that for the fact that they won’t get to that level until the end of 2024, you’d probably want to cut 10-15% from that price. I’ll keep it simple and pencil in a 15% return to that $49 level over the next year and a half, giving us $42 as a more optimistic “max buy” level for Unity shares today, for those who want to ride on the growth of this technology. You’d still want to take a shot of optimism before you click that “buy” button, but you ought to be able to look yourself in the mirror tomorrow without too much shame if it turns out wrong — that’s a rational price for a patient person who thinks 3D gaming and entertainment will continue to grow.

On the slightly more conservative side, I’ll stick with something a little bit lower for a “preferred buy”, I’ll slot that in at 40X adjusted earnings for the coming four quarters, since it seems very likely that they’ll be able to grow earnings at at least a 20% annual rate going forward (I like to pay a PEG ratio of below 2.0 — a PE that’s less than twice the growth rate, though Peter Lynch might tell you to be more conservative and look for a PEG below 1.0). Analysts expect 66 cents in adjusted earnings over the next four quarters, so as of today that “preferred buy” would be about $26.50.

If you want to be a stickler and insist that stock-based compensation should count as an actual operating cost, then you’re out of luck — you don’t get to buy companies like Unity, which probably won’t be GAAP profitable for at least a few more years, if ever. That’s one reason I’d never go in big with this position, but I can handle pretending and using adjusted numbers for at least a small holding, when we’re dealing with what could be a fast-growing platform company in a fast growing technology sector.

So that fits with the first part of his acronym, Symbotic, Unity and Palantir are our “SUP” stocks… but then Lango tails off and doesn’t offer much in the way of clues about his other four stocks, the RMAN picks. Presumably those are the first letter of the ticker symbol for those stocks, so might we guess at the RMAN picks to fill out SUPRMAN?

Guesses that I’ve come up with, including input from readers as well as my own noodling around, include…

R: Roblox (RBLX), Roku (ROKU) Recursion Pharmaceuticals (RXRX) or Rambus (RMBS)

Here my guess would be Recursion Pharmaceuticals (RXRX), if only to get an AI drug discovery platform into this portfolio. And they’re little, and fit another of Lango’s clues (he said that one of his stocks is around $9, which is where RXRX is today… or if he really pulled the data earlier in May, it would have fit the other price clue, that one of his stocks is around $5… in that case, PLTR could be the one that takes the “$9” slot, it was around that level a few weeks back).

Recursion Pharmaceuticals is a $1.8 billion company that trades at 35X revenues, so it’s not for the faint of heart — and their revenue isn’t likely to grow into anything meaningful within the next few years, so this is really all about the potential that their systems could develop drugs that turn into large royalty windfalls in the more distant future (AI drug discovery might be speeding up a lot, but the actual FDA approval process and the long time lag of testing for safety and efficacy in human beings, using clinical trials, is not going to accelerate as dramatically, so any drugs discovered by their system still have to slog through approvals).

Among the others, I own Roku (ROKU), and I continue to think they’re well-positioned for the growing push toward more and better-targeted advertising in streaming video, they got another boost from the news this week that Amazon Prime Video is exploring an ad-supported tier, joining Netflix and others who are realizing that subscription fees can’t keep up with these massive content creation costs… but there’s nothing really sexy and AI-focused about ROKU, and Lango mentioned it as a past favorite so it’s not likely he’s also got it as a ‘secret’ pick. Roblox (RBLX) is so kid-focused that it’s really hard to see them hitting transformational growth, so many kids “age out” of Roblox each year, but that one could grow, too — it’s just hard to see Lango pitching both Roblox and Unity in the same breath, that’s a lot of weight on unprofitable game developers, and Unity has more potential to broaden its reach than Roblox does. (I updated my look at Roblox here this week, to answer the continuing questions about a Ross Givens “stock of the decade” ad, in case you want more). Rambus (RMBS) might be interesting as a fairly small IP player, benefitting from big investment in new chips for AI as their royalties rise with new chip designs going into production, but it’s not as direct a play on AI disruption as Recursion could be.

To get back to my best guess, here’s how Recursion describes themselves:

“Recursion is the clinical-stage biotechnology company industrializing drug discovery by decoding biology. Enabling its mission is the Recursion OS, a platform built across diverse technologies that continuously expands one of the world’s largest proprietary biological and chemical datasets. Recursion leverages sophisticated machine-learning algorithms to distill from its dataset a collection of trillions of searchable relationships across biology and chemistry unconstrained by human bias. By commanding massive experimental scale — up to millions of wet lab experiments weekly — and massive computational scale — owning and operating one of the most powerful supercomputers in the world, Recursion is uniting technology, biology and chemistry to advance the future of medicine.”

There are lots of “big data” or “AI” powered drug discovery platforms who hope to dominate the future, I can’t say I have any insight into whether Recursion will be the best of them, and that revenue growth will be a long time coming… but in biotech, it’s really all about the story and the breakthrough in clinical trials, which typically comes at least five years before the revenue from a new drug could possibly hit the income statement. You can check out their investor presentation here if you’d like to try to get a handle on how the business works.

M: Mobileye (MBLY), Marvell (MRVL), Microchip (MCHP), Micron (MU), Manhattan Associates (MANH)

Those are mostly very large chip companies, well above $40 billion in market cap — Manhattan Associates (MANH) is a bit smaller and growing nicely but is also in the same “logistics management” space as Symbotic, without a real “AI” connection (they don’t even mention AI in their quarterly press releases, which might be refreshing but indicates that they’re not likely to be a real investor darling in this hype cycle).

Micron (MU) is somewhat contrarian these days — several chip stocks have had big runs (including Microchip (MCHP) as well as more directly connected stocks like AMD (AMD) and NVIDIA (NVDA), but Micron hasn’t, they’re stuck in the morass of providing somewhat commoditized memory chips, not the sexier processors that do the machine learning processing (learning and inferencing)… still, more AI means more data, and data needs to be stored, so I suppose MU could fit. Awfully big for this particular portfolio, though, with a $70 billion market cap.

And if Lango were pitching the autonomous driving part of AI, it seems silly to pick Mobileye (MBLY), which is a $30 billion company spun out of Intel (INTC) last year, instead of one of the many other autonomous driving-focused LiDAR companies that he has touted over the past few years, all of which are still quite small (and, like with AEVA, which he has been pitching as a play on the “Apple Car,” much smaller than when he first picked the stock). Though I guess MBLY does have the advantage of a much more sustainable and profitable business than all the little LiDAR hopefuls these days (they were initially focused on the camera-based sensors that are cheaper than LiDAR, though they’ve also built software and systems on top of that initial technology — Intel bought MBLY back in 2017 for $15 billion, if you want the back story, and spun them out as a public again at a $23 billion valuation late last year).

(For what it’s worth, if I were to buy into a stock primarily for its autonomous driving exposure, I’d start with Aptiv (APTV), just because it’s reasonably valued and has good auto industry partners — I’ve owned that one in the past, but don’t currently own anything in this space.)

I don’t have a good “M” to suggest here, so I’ll just settle on the wild guess of Micron to get one more “beaten-down” stock into this group. It’s at least the cheapest of that bunch, by most valuation metrics, though it’s currently in a bit of a lull before it’s likely to return to meaningful profitability in the next year or two.

A: Allegro Microsystems (ALGM) Aeva (AEVA), C3.ai (AI), Axcelis (ACLS), Appian (APPN)

I’d like to keep it simple and just assume that Lango is pitching C3.ai (AI) here, since that’s an obvious AI play that is still quite small. We’ve written about that one a bunch of times, including when Enrique Abeyta over at Empire pitched it as his #1 AI Play for 2023, and it’s a natural landing spot for a lot of AI hype — even though, last quarter, the financial story disappointed investors who had bid the shares up. Lango has also touted AEVA before, as I noted above, so maybe he’s going back to the well there — but it would be a little embarrassing to re-recommend a stock that he touted for his entry-level newsletter in the $3-5 range for a higher-cost newsletter, particularly since the stock has fallen to $1 and change.

If he’s not a C3.ai fan (I wouldn’t blame him), perhaps Axcelis (ACLS) could fit as a play on rising semiconductor foundry investment, and has been teased for that reason by Ian King this year, somewhat of an indirect AI play over the much longer term. Allegro is a maker of power control and sensor chips, so they may indirectly benefit from more automation and more autonomous robotics, but again it’s not very direct.

When I look over these possibles, though, Appian (APPN) might actually be the most interesting one here, they’ve been a little bit left-for-dead after being a big winner of the SaaS mania of 2020, they provide a low-code platform for customizing enterprise software, and they’ve continued to grow pretty nicely… and they are integrating AI into the business, though it’s not a key part of their quarterly earnings press releases yet.

So I’d peg my best guess for Langos pick as being AI or APPN, and of those two I’d much rather buy APPN — they’ve so far proven to have a very sticky product for their customers, even as companies have pulled back on some spending in recent quarters, with retention rates of 98-99%, and dollar retention of about 115% for their subscription business (which is the core of the business, subscription software used to be about half of revenue, with the rest being services provided to customers, and now, with roughly 30% growth year over year in the cloud subscription business, they’re up to more than 75% subscriptions, with a resulting improvement in gross margins, now around 75% on an adjusted basis).

Here’s what Appian’s CEO said on their last conference call:

“I explained the emerging split between what I call ‘public AI’ and ‘private AI’. Public AI involves sharing data with a cloud AI provider, and that’s unacceptable to many of our clients. Companies want to keep control of their data — they may have legal restrictions as well — and they don’t want to help train an algorithm that could then be used by their competitors. Private AI, by contrast, means every company cultivates their own AI algorithms, starting with a public model, but training it privately and using it privately.

I predict that in the long run, private AI ‘wins’, which is to say it becomes the more popular model for our customers. I think customized AI algorithms will someday be as normal as custom applications, inside big firms. Private AI will feature strong accuracy, despite having smaller training datasets, because the data is more pertinent, and the scope of each AI will be narrower. (These AI’s won’t write limericks or make images – they’ll do just the one thing they’re made for.)

Appian will facilitate both kinds of AI, but we prefer the private model. We announced some new features – which I call ‘low-code AI’ – that make it easy for customers to cultivate their own AI on Appian-connected datasets.

“This public/private split separates Appian from its largest competition. By being a champion of private AI, we appeal to buyers who prefer not to share their data assets.”

It’s probably too soon to really be certain about who the winners will be, but that’s a good sales pitch. And Appian also has quietly built a solid business in providing software to government entities, which are slow to procure but tend to be even stickier than big corporations, so that’s worth paying attention to. Appian is still losing money, they’ve been spending on people to improve service and are still pushing for growth, so they’re burning cash, but at about the same rate as a year ago (roughly $25 million this quarter), so if they stay at this pace, their $250 million cash balance will last another couple years… though one hopes that the cash burn will turn around as growth continues to pick up and the scalability of the growing cloud SaaS business takes over. They’re expecting to get to almost $300 million in Cloud subscription revenue this year, so they’re valued at about 10X their subscription revenue (less than 7X revenue if you include their non-subscription sales), which would have been an easy buy during the mania in 2021, when just about every SaaS company traded at at least 20X sales, but it looks less enticing at the moment, given the likelihood that they won’t be profitable within the next couple years. Intriguing possibility, and I hadn’t thought about that “private AI” aspect of the business, though I’d really like to have more confidence that they can scale up and improve margins.

N: NVIDIA (NVDA), NICE (NICE), Nerdy (NRDY), National Instruments (NATI)

Given that Lango specifically called out two of his stocks as being low-priced, at around $5 and $9, I suspect he’s not drifting down into the even-lower realm where we find Nerdy (NRDY) (which is around $3 now), since he probably would have mentioned that — though Nerdy does say they’re actively using AI in education, so I suppose they’re one of the companies disrupting Chegg (CHGG), which was a Lango pick during the school-from-home surge. NVIDIA is way too big to be called out by a service that’s trying to pick smaller stocks, though it’s obviously the most successful large cap stock with a real AI story tied to its core business. National Instruments (NATI), not unlike Keysight (KEYS), is sort of a general play on “technology is moving faster and getting more important”, because they sell testing and monitoring equipment, but it’s in the process of being acquired by Eaton (ETN), so the stock isn’t likely to do much from here.

So in the absence of a better “N” story stock for an AI tech melt-up, I’ll guess that we’re being pitched the Isreali B2B tech company NICE (NICE), which could become a disruptive AI-powered force in the call center business. They are nicely profitable, have good businesses in providing both automated customer service and, separately, in monitoring and preventing financial crime, using at least some machine learning and AI systems in both of those endeavors. I started thinking about NICE back when Stansberry was teasing one of their competitors a couple years ago (Medallia (MDLA), which was subsequently bought by Thoma Bravo), but it’s been a while since I checked up on the valuation.

NICE was also briefly a market darling during the manic period, so they’re well off of their highs (the stock is around $215 today, they got over $300 for a few minutes in 2021), and they trade today at a somewhat reasonable valuation — they’ve been growing their earnings at an average rate of about 12% a year, and are expected to keep that pace up for the next few years, and they trade at about 24X their expected adjusted earnings over the next four quarters. The growth has been very linear and steady for this one, so that feels like a reasonable price to pay — though it’s not obviously cheap unless they’re likely to kick up the growth (they did have a big 35% earnings jump year over year last quarter, so perhaps that’s a good sign), and, of course, their stock-based compensation eats up half of that earnings per share number if you don’t adjust it.

So… to sum up, we can be certain about SUP, and these are my best RMAN guesses:

S: Symbotic (SYM)
U: Unity Software (U)
P: Palantir (PLTR)
R: Recursion Pharmaceuticals (RXRX)
M: Micron (MU)
A: Appian (APPN)
N: NICE (NICE)

Are we really in the “first inning” of an AI “game” that will lead to a multi-year tech melt-up? I don’t know. We’re certainly in a manic period now as any AI-related stocks are continuing to surge higher, almost regardless of their operational performance, and even the big tech names are helping to lead the market again. It is very likely that the Fed will “pause” its interest rate hikes next week, at least for one meeting, though it’s also likely that whatever the Fed says about the next few quarters will be what really drives sentiment from this meeting, not the widely-expected “pause.” The bond market is still quite sure that the Fed will be cutting rates within the next year or two, to save us from whatever the next crisis turns out to be, so perhaps we’ll be back to “easy money” times and all stocks will delight from the cash spigot being turned back on.

The world is much different than it was in the mid-1990s, and the broader market is still quite a bit more richly valued than the market was back then, when it was just beginning to inflate the dot-com bubble, and quite a few large tech stocks, including NVIDIA, are trading at valuations in excess of what the hottest large-cap internet names hit at the peak in 2000s, so there’s some argument to be made that maybe we’re already close to a maximum bubble valuation for the market… but that doesn’t mean we can’t see a surge of smaller tech “story” stocks take on leadership and rise in value if AI spending by corporate America and the government really picks up and fills the coffers of these kinds of companies with unexpected revenue growth.

I’ve done a little speculating on Symbotic, as I noted, and I hold a small Unity Software position. I’d be inclined to take another look at Palantir if it gets back down to the $10-12 range, and I like the Appian story, but the stock from this list that I’d be most comfortable owning at current valuations would be NICE (I don’t own it, to be clear)

It’s your money, though, so you get to decide what to do with it — see a hype cycle building for AI-related tech stocks beyond this current spike of interest? Think it will fizzle before the year is out, or send us into a wacky new bubble that echoes the 2000 mania? Have other favorites that you think will benefit as AI goes mainstream? How much speculative fervor do you want to gin up in your portfolio these days? Have questions about any of the above? Do let us know with a comment below.

And thanks, as always, for reading and supporting Stock Gumshoe — have a great weekend!