The next stage of AI may reward a completely different set of stocks.
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Tom Young here with today Smart money.
I was looking to upgrade my smartphone.
Each new model seemed revolutionary. iPhone 3… iPhone 6… iPhone 8… Each new generation was miles ahead of the one before it.
Then something changed.
By late 2010, smartphones were “good enough.” (I’m now using a Google Pixel with a build number I don’t know.)
Most people stop upgrading every couple of years because the improvements simply weren’t worth it. This transformation reshaped the entire industry.
Former smartphone giants such as HTC, BlackBerry, and Nokia were quickly replaced by lower-cost manufacturers. Meanwhile, Apple Inc. (Apple) And it kept winning – not because it always had the best hardware, but because it had the ecosystem.
Artificial intelligence may have reached a similar turning point.
The companies that make the fastest chips or the biggest AI models may not be the biggest winners in the next phase. Instead, these companies may be companies that build products that people depend on every day.
A little-known Chinese startup has perhaps given us the clearest signal yet.
Let’s take a look…
Free AI is almost as good
Last month, Chinese startup Z.ai released GLM 5.2, an open source AI model that ranks among the best in the world.
Unlike models from OpenAI, Anthropic, or Google, GLM 5.2 is completely free. Anyone can download, modify and even use it commercially.
What’s even more impressive is that it’s good enough to run complex tasks. I took the model for a test drive, and I can say it’s roughly on par with America’s leading AI systems.
And Z.ai is not alone.
It is one of China’s “Six AI Tigers,” a group of startups that are only months behind the best American companies. They are abandoning capable models and monetizing cloud computing instead.
In other words, cheap, “good enough” AI will arrive much sooner than many investors expected.
Today’s fourth-best AI model can already perform many real-world business tasks, and doesn’t require the latest Nvidia chips to do so. Instead, it works well on the latest generation devices available from Chinese companies.
This makes artificial intelligence very similar to smartphones. When the technology gets good enough, buyers become less willing to pay high prices for high-end devices unless you own the entire ecosystem like Apple.
In fact, this has happened with almost every new technology. TVs… digital cameras… computers… solar panels… When the “good enough” versions start coming out, price becomes more important than having the latest model.
This doesn’t mean that AI is slowing down, but it does mean that the companies that get the most profits will change.
Why this changes the investing story
Instead of flowing primarily to hardware makers, more value could shift toward companies that build indispensable AI-driven products, software, and ecosystems.
That’s why Eric was cautious about chasing the hottest Semiconductor stocks After their huge gains no one wants to be caught carrying their next BlackBerry.
Instead, he continues to focus on what we call it Applied artificial intelligence: Companies that use artificial intelligence to create products that customers cannot easily replace.
Several months ago, Eric and I warned that parts of the AI market were becoming overheated. Just as smartphones have evolved from sophisticated devices into everyday commodities, AI may be entering its own “iPhone moment.”
If so, the biggest investment opportunity won’t necessarily be building better AI. Companies using cheap and increasingly powerful AI will have the power to operate.
You can learn more about Eric’s recommendations Applied artificial intelligence companies in Fry investment report.
Simply click here to learn more.
Until next time,
Thomas Young, CFA
Market Analyst, InvestorPlace
