🧠 Will AI Reignite SaaS Growth?


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Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better.

Today's Issue Read Time: <3 minutes

  • Lesson: AI and SaaS applications
  • Timeless Content: Understanding valuation multiples
  • Thread: The Sam Walton story
  • Resource: ETF finder
  • And more!

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Friends,

On November 30, 2022, a seismic shift rippled through the tech industry. ChatGPT was introduced to the world. In the 18 months since, artificial intelligence (AI) has drastically improved and changed the way some industries operate.

For investors, the opportunity has come in waves.

Wave 1: Semiconductors -- NVIDIA shares are up over 450% since ChatGPT's release. The biggest reason: everyone is gobbling up NVIDIA's chips for data centers. Notice that revenue growth accelerated immediately after ChatGPT's release.

Wave 2: Hyperscalers -- Amazon shares are up a more modest 90% since ChatGPT's release. The company was a major purchaser of those NVIDIA chips for its Amazon Web Services (AWS) offerings. Notice that it took about a year for that AI-induced bump to surface for Amazon. This makes sense: it takes time for the chips to be installed in AWS data centers.

Wave 3: Software-as-a-Service (SaaS) Applications -- Snowflake shares are only up 15% since ChatGPT's release. In theory, the company's usage-based data-crunching tools should be major beneficiaries of AI. But as you can see, revenue growth has not re-accelerated.

Does that mean Snowflake won't benefit from AI?

Not necessarily.

It takes months for those NVIDIA chips to make it to Amazon. And then it takes months for Amazon's customers to start ramping up AI-usage. Only then would a benefit show up for Snowflake.

That's why the next year will be incredibly important for stocks like Snowflake (as well as similar companies like MongoDB, Datadog, and Cloudflare). The top priority for long-term investors should be revenue growth re-acceleration. That's what we'll be watching closely in the year ahead.

Of course, a single quarter doesn't make or break a company, but this is decidedly an important threshold for investors in such companies.

Wishing you investing success,

- Brian Feroldi, Brian Stoffel, & Brian Withers

P.S. Both Snowflake and NVIDIA will come out with earnings later today. Check out our YouTube channel for real-time updates on the results.


One Simple Graphic:


One Piece of Timeless Content:

The P/E is one of the most popular ways to judge a stock's valuation, but this metric has numerous limitations. Morgan Stanley's Michael Mauboussin explores the P/E and EV/EBITDA ratios to explain the benefits and limitations of these popular valuation metrics.


One Thread:


One Resource:

Interested in investing in a sector or industry you aren't familiar with? One of the best ways to do that is through an ETF. But how do you find the ETFs that cover your interests? This tool allows you to input a stock, and it will return any ETFs in which it resides.


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Long-Term Mindset

I teach investors how to analyze businesses. Each Wednesday, I share six pieces of timeless content that can be read in less than 2 minutes. Read by 100,000+ investors from a16z, Amazon, Google, Microsoft, and more.

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