Editor’s note: “Why the Most Astonishing AI Gains May Still Be Ahead” was previously published in January 2025. It has since been updated to include the most relevant information available.
In late January, Chinese AI startup DeepSeek released its powerful R1 model, an open-source ChatGPT rival on-par with incumbent chatbots. And reportedly, it cost 95% less to create.
This breakthrough challenged the assumption that AI model development is absurdly expensive, as incumbent firms like OpenAI and Google have demonstrated, inciting panic across Wall Street. Suddenly, it seemed that the AI Boom faced a massive existential crisis.
But as it turns out, this DeepSeek drama didn’t signal the end of a bullish era. It merely marked the beginning of a ‘phase shift’ in the ongoing AI Boom.
And this next phase may be far more profitable for investors who know what AI stocks to buy.
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Many industry experts note the striking similarities between today’s AI Boom and the Dot Com Boom of the 1990s. And that comparison feels spot-on to us.
The internet was a revolutionary technology that proliferated throughout the global economy and changed everything about how we work, play, travel, communicate… It changed everything about everything.
And when it comes to AI, just lather, rinse, and repeat.
AI is another revolutionary technology proliferating throughout the global economy – and changing everything about everything.
As revolutionary technologies go, AI and the internet have very strong parallels.
And the AI and Dot Com Booms also have very strong parallels on Wall Street.
AI and the Internet: Striking Parallels
In 2023 – the first year of this AI Boom – the S&P 500 rose more than 20%. And it rose more than 20% once again in 2024, meaning the market has soared 20%-plus two years in a row.
The last time it did that? In 1995 and ‘96 – during the first two years of the Dot Com Boom.
Take a look at the S&P’s price action over the past two years as well as in 1995 and ‘96. As you can see in the graph below, those lines match up almost perfectly.
In today’s AI Boom, stocks are following the exact footsteps they made in the Dot Com Boom.
And of course, the 1990s’ market boom played out in two phases: first it was all about the ‘Builders,’ then the ‘Appliers’ took the baton.
That is, when the internet first emerged, telecom companies rushed to build the infrastructure needed to support the internet’s buildout. This was the Builder phase – Phase 1.
And it’s why, in the 1990s, the Dot Com Boom’s biggest winners were internet ‘Builders’ – the companies establishing the net’s infrastructure.
Indeed, from 1995 to ‘99, Qualcomm (QCOM) rose almost 6,000%. AppliedMaterials (AMAT) popped about 1,000% over that same stretch. Semtech (SMTC) rocketed almost 7,000% and VeriSign (VRSN) soared about 3,000%.
These were internet Builder stocks – and they stole the show during Phase 1 of the Dot Com Boom.
But they aren’t the winners that we think of today when it comes to the Internet Revolution.
Instead, Amazon (AMZN), Netflix (NFLX), Meta, Alphabet (GOOGL),and Microsoft are top-of-mind. These are some of the largest and most powerful companies in the world. And yet, none were internet-builders.
They are the ‘Appliers.’
The Boom’s ‘Phase 2’
Once the internet’s infrastructure was built, we pushed into the ‘Applier’ phase. That’s when today’s tech titans actually applied the internet to various industries, creating entirely new business models that have since become internet empires.
For example, Amazon applied the internet to the commerce industry, creating an e-commerce empire.
Netflix applied the internet to the entertainment industry, and it now dominates in the streaming arena.
Meta applied the internet to the communication industry; Alphabet to the information services industry.
As a result, these firms have become the world’s largest companies… the stock market’s biggest success stories.
And they were all internet appliers.
Now, considering how similar the AI and Dot Com Boom have already proven to be, the AI Boom’s ‘Applier’ phase could also solidify the next generation of market champions.
And we believe DeepSeek just accelerated the shift into this boom’s Applier phase.
AI Appliers Are Pulling Ahead
For the past two years, we’ve been in the AI Builder phase.
Companies have poured billions of dollars toward creating the infrastructure necessary to facilitate the AI Revolution. They’ve been building new data centers, constructing new chip fabs, developing next-gen AI chips, so on and so forth.
Indeed, this era has been dominated by those building out the groundwork necessary for AI to thrive on a global scale. And as a result, such AI Builder stocks have been on fire.
We view semiconductor stocks as a good proxy for AI Builders as they comprise the firms that build the chips, equipment, etc. that power AI technologies. And from early 2023 to summer 2024, semiconductor stocks led the AI Boom, soaring about 130% higher.
Meanwhile, Applier stocks – the software firms looking to develop and apply new AI models – rose just 70% over that same time frame.
But that has changed over the past few months.
Since mid-July 2024, AI Applier stocks have been crushing incumbent Builders. Software stocks are up 20%, while semiconductor stocks are down 20%.
We have “phase-shifted,” if you will.
And this is where we predict the biggest winners of the AI Boom will emerge.
The Final Word on the AI Boom’s Next Phase
Remember: As great as internet builders were, appliers were better.
Qualcomm, the quintessential internet Builder stock, has soared about 10,000% since 1995 – an excellent return.
But Apple, an internet Applier, is up about 67,000% in that time. Netflix is up about 84,000% since its IPO. Similarly, Amazon has surged an astounding 264,000% since it went public.
Clearly, the internet application boom produced huge returns.
The AI Application Boom could do the same.
So, how does DeepSeek fit into all of this?
The firm’s breakthrough made clear that, with software innovation, programmers can create robust AI models with relatively little advanced hardware. That somewhat commoditizes hardware and shifts the innovation to the software stack.
In other words, the software race has become the one to win – which means we have shifted from the ‘Builder’ to the ‘Applier’ Boom.
We’ve entered ‘Phase 2.’
Yet… to fully capitalize on this shift… you need to be focused on the right AI Appliers.
To help us do that, let’s turn to Elon Musk – the world’s richest man – and his startup, xAI.
We’re confident that firm has the opportunity to become a major winner in this next phase of the AI Boom.
And while it’s not yet publicly traded, we’ve found a promising ‘backdoor’ way to invest in the company.
Learn more about xAI and its portfolio-boosting potential now.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.
