The AI Gold Rush Needs Some Direction

AI has been a stick of dynamite for this year's market...

And as with any explosion, it's breaking stocks into "blast zones."

The biggest winners are those closest to the center of AI technology... the AI "hyperscalers." That's no surprise to anyone.

But this is a gold rush. And in a gold rush, the folks who own the mines aren't the only ones who profit...

Outside the immediate circle, "picks and shovels" AI providers are seeing plenty of benefits. These businesses supply the AI revolution in some way, whether that's through data-center equipment, chips, or power supplies.

According to management consulting firm Bain, even software companies – which should be on the cutting edge of AI adoption – are only tapping into about 20% of the possible ways to use AI. And that's only the ways we've found so far.

Right now, we're seeing a bunch of confused companies that want to integrate AI into their businesses. But they have no idea how to do it.

And they don't turn to shining stars like Nvidia (NVDA) or Microsoft (MSFT) to get their AI services off the ground...

Accenture (ACN) is one of the largest consultants in the world...

The company thrives on helping businesses transform. It was one of the first consultancies to start selling "asset-based consulting."

Sometimes called "digital-transformation consulting," this model doesn't sell projects based on hours worked. Instead, it sells intellectual property.

Through digital-transformation consulting, Accenture builds and sells tools in addition to hours worked. The company might help clients build a modern website architecture or a new digital image. The website or branding package itself has its own sales price, on top of the labor costs.

But Accenture also excels at transforming its own workforce according to industry trends... by hiring talented people and providing training on the latest technologies as they're being developed.

Said another way, Accenture isn't necessarily supplying physical equipment to the AI gold rush. It's supplying intellectual know-how.

More than 700,000 of its employees have already taken at least some AI training courses. This approach has helped Accenture book nearly $1 billion in generative AI bookings through May 2024.

That's pretty impressive, considering this part of its business didn't exist in February 2023...

At the moment, generative AI revenue still accounts for just under 3% of the company's 2023 revenue from consulting operations.

It's expected to contribute more and more each year moving forward.

AI adoption is still nowhere near its full potential...

As of December 2023, there were around 11,000 data centers in the world. Capital expenditures for data centers are expected to reach $1 trillion by 2027... up from just $250 billion last year.

So data infrastructure is going to quadruple. But the many different ways we can use that data will grow even faster. As we said, software companies are only using about one-fifth of the AI uses they've identified so far.

Accenture knows most businesses still don't know what they're doing with AI. It's positioning itself as the go-to for AI implementation.

That means at a minimum, its AI revenue should keep up with market growth... And realistically, it should outpace the market.

Regards,

Rob Spivey
July 23, 2024

P.S. Accenture is in a strong position to benefit from the AI boom... But for the biggest possible gains, you need to look a little smaller.

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