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Greetings, investors.

Picture a crossword puzzle where each answer reveals the next.It's a mind exercise where one solution leads to another—a dynamic representation of the current AI investment climate.

Consider this clue: Three words stake a claim in investor dread: “supply is ____.”

There’s an obvious seven-letter answer.

Limited.

This term is transforming into a critical piece of the AI investment puzzle. As global demand surges for AI-driven components—be it chips, servers, or electrical power—the supply chains are increasingly faltering.

When the supply dwindles, those companies best positioned to deliver these essential resources stand to reap the most significant rewards. Investors have to closely scrutinize where these bottlenecks are forming within the AI sector.

In today’s Smart Money, I’ll dive into the two primary constraints currently challenging AI growth, their implications for market players, and how you can strategically invest in this evolving landscape.

Identifying AI's Current Constraints

Let’s start with the lifeblood of AI: energy.

AI systems operate in vast data centers, which rely heavily on high-performing chips from tech giants like Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD). However, these chips require substantial power to function; without it, they’re rendered useless.

Thus, energy isn’t just a nice-to-have—it’s essential for AI's very existence, marking it as one of the most serious bottlenecks in the industry.

Local power grids are already facing the strain of increased demand. In fact, electricity prices in select regions have skyrocketed, soaring by up to 267% compared to five years ago. This scenario suggests that future winners in AI might not solely be those crafting sophisticated algorithms but also the energy providers ensuring those systems run efficiently.

Addressing this escalating power need necessitates a multifaceted strategy. It means embracing a mix of energy sources: wind, solar, nuclear, and natural gas. Major players like Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), and Amazon.com Inc. (AMZN) are forging ahead with investments in alternative power sources to ensure reliable electricity for their anticipated AI infrastructures. For instance:

• Microsoft is committed to a 20-year electricity purchase agreement linked to the reopening of the Three Mile Island nuclear plant in Pennsylvania.
• Alphabet is partnering with Kairos Power to harness energy from small modular reactors (SMRs).
• Amazon is allocating $20 billion towards AI data centers in Pennsylvania, strategically locating near the Susquehanna nuclear plant to secure its power supply.

Energy supply is proving to be a competitive edge in the AI race. Yet it’s just one of the pressures shaping the sector; memory constraints present another significant hurdle.

Memory: The Essential Component

Every AI operation hinges on memory, specifically DRAM. Without adequate memory, systems run out of space for processing information—a crisis that may persist for years. Meanwhile, nearly 100 gigawatts of new data centers are expected to come online within the next four years. However, current memory production can only support a fraction of that, approximately 15 gigawatts, over the next two years.

Without sufficient memory, artificial intelligence effectively loses its ability to function.

Nvidia's CEO Jensen Huang underscored this dilemma recently, stating, “The memory bottleneck is severe.”

Elon Musk echoed similar sentiments during SpaceX's latest earnings report, declaring, “The limiting factor currently is memory.”

These industry leaders are not merely embellishing their problems. The implications of such bottlenecks are profound, shaping the course of AI investing.

Learning from the Past: Bottleneck Strategies

We've witnessed this pattern before in technology history. A shortage of critical resources appeared vividly during the dot-com era, as the internet’s expansion led to unexpected benefactors, extending beyond just software companies.

As infrastructure demands surged, so did the need for metals like copper and tantalum. However, mining and refining could not scale quickly enough to meet this newfound demand, leading to a classic supply bottleneck. Savvy investors who grasped these emerging trends ahead of time capitalized significantly.

From 1998 to 2001, I advised my readers to focus on mining stocks and witnessed remarkable gains in economic value. Companies such as Antofagasta plc (ANTO.L), a copper-focused entity, became pivotal players during this boom.

• Over the following three years, Antofagasta’s stock surged by 205%, all while the S&P 500 stagnated.
• In a span of six years, the stock delivered an impressive 778% gain, while the broader market struggled with a 27% decline.

Antofagasta managed to build capacity during a period ripe for investment, enabling it to thrive once the metal shortages kicked in.

This presents a compelling argument for recognizing bottlenecks early, a strategy we have the opportunity to employ again as AI matures.

Deciphering AI's Future Leaders

The notion of limited supply is merely the tip of the iceberg. To uncover the most lucrative opportunities in this space, investors must decode four additional critical questions:

1. Where is the demand outpacing supply?
2. Which firms hold the keys to these bottlenecks?
3. How challenging will it be to augment supply?
4. Has the market caught on to these opportunities yet?

If you’re interested in digging deeper, I invite you to check out my free Market Shock presentation. I’ll be unpacking AI's physical limitations—energy, memory, and a third critical bottleneck waiting to influence the next wave of AI leaders.

I will also unveil a selection of companies primed to capitalize on these emerging constraints, including 15 free stock recommendations ready to thrive amid the AI supply shortages.

Navigating the intricacies of AI is paramount for informed investing. Recognizing and addressing the bottlenecks that limit growth is the key to uncovering the firms prepared to excel in this landscape.

Click here for insights on how to capitalize on these trends.

Sincerely,

Eric Fry