China’s Big AI Advantage and How U.S. Investors Can Profit

By Michael Salvatore, Editor, TradeSmith Daily

Technology’s 300-year war with copyright law continues
Three stocks entwined in the future of AI data
We put these two big AI names on your radar before the crowd caught on
Small-cap health is rapidly improving, and that’s bullish for the sector

The biggest story in AI right now has deep historical roots…

In 1710, the British Parliament passed the Statute of Anne and established the world’s first copyright law.

At that point, the Gutenberg printing press had been operating for over 200 years… with no rules. This revolutionary technology had made the act of copying and mass-reproducing writing easier than ever. But authors wanted rights over how their work was used.

This forced lawmakers to establish a “right to copy” – exclusive but limited copyrights for authors – not the publishers who distributed their work.

The following centuries saw countless challenges and revisions to this precedent. But the most relevant of these was in 2001, when A&M Records sued Napster for distributing copies of songs over the internet. Napster lost, with the court finding it was liable for copyright infringement. It shut down the same year.

Here again, we see a technology capable of mass reproduction forcing the hand of copyright law.

Now, two other landmark copyright cases are hitting the headlines…

This time between traditional news publishers and AI companies.

In December 2023, The New York Times sued ChatGPT maker OpenAI, alleging it and Microsoft unlawfully used millions of the Times’ articles to train AI models without permission.

And just last week, Rolling Stone publisher Penske Media sued Google for its AI summary search feature. Penske claims this is taking traffic away from its websites.

Once again, technology is forcing the hand of law to set a precedent. And how the law decides this issue will be a big deal for AI.

AI is already changing how we interact with search engines, conduct research, and consume media. For the first few years, Large Language Models (LLMs) would freely “crawl” the web for data to use in its results. Once these cases settle, that may no longer be legal.

We can envision a world with a “pay-per-crawl” model. LLMs that want data from a specific source may have to pay for it. The cost is still TBD. The Times’ lawsuit damages figure has not been released… But it’s believed to be in the billions of dollars, and that gives us an idea of how much publishers expect.

All of this has massive investment implications.

AI model makers could have to pay out big to license copyrighted material, impacting margins. And if the pay-per-crawl model is too restrictive, then it could gimp the AI trend severely by making it harder for models to stay up to date with important info.

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The copyright issue may also tilt the AI field in China’s direction…

China is, let’s just say, not too concerned with copyright law.

The country has a reputation for making liberal use of imitation and mass reproduction for everything from knockoff designer handbags to military-grade tech.

If the Chinese attitude toward AI copyright is as lax as we can expect, AI models in China could flourish much faster their U.S. rivals.

With the sheer potential of the AI trend globally, it’s important to understand the risk and opportunity of China’s AI capabilities. If China’s AI tech overtakes the U.S., that could mean trouble for U.S.-based AI firms… not to mention broader-scale troubles stemming from China’s rivalry to the U.S.

And this is all on top of China’s rapidly accelerating energy capacity – a critical element of the AI buildout and an important story for another time.

But since the U.S. has a history of taking copyright law seriously, let’s think of how we can take advantage of this trend as U.S. investors.

One potential profit play is cybersecurity stocks…

Cybersecurity companies keep their websites online and safe from digital attacks. But increasingly, they also provide Content Delivery Networks (CDNs) – essentially a way to load content faster and more reliably for website visitors.

These networks hold the power to stop AI models from crawling data for free. So the company that winds up having the biggest of these CDNs will hold the keys to the LLM kingdom.

Today, let’s look at three players in this space across the market cap spectrum – Akamai Technologies (AKAM), Cloudflare (NET), and Fastly (FSLY).

With TradeSmith’s hedge-fund level tools, we can get a quick read on which of them are worth your investment. And one of the best ways to do it is with our Quantum Score.

This rating system was designed by colleague and former head of equity derivatives at Cantor Fitzgerald, Jason Bodner. He spent more than a decade executing multimillion-dollar trades for the most powerful people on Wall Street.

His Quantum Score crunches all the important fundamental and technical factors for any stock.

Our research shows that revenue, earnings, profit margin growth rates, and positive price momentum are all key.

But the single biggest factor is the presence of Big Money – the buying pressure from Wall Street’s biggest institutions.

The Quantum Score sniffs out the signs of Big Money flowing into stocks. This allows it to identify explosive stock moves before they happen, and well before they’re plastered all over the news.

A backtest going back to 1990 shows that holding the top tier of Quantum Edge stocks results in a portfolio that beats the market by more than 5 to 1. Safe to say it’s worth following these names… and checking if stocks like AKAM, NET, and FSLY rank among them.

Let’s begin with the Quantum Score for $11.4 billion CDN provider Akamai Technologies…

AKAM is the only one of these three companies with positive earnings. But its slow growth rates earn it a good, but not great 67 on Fundamentals.

The more middling 44.1 Technical score reflects its anemic price action – it’s down 20% this year and 30% over the last five years:

That said, if you’re looking for a lower-risk stock, AKAM is the pick of the bunch. It has the lowest Volatility Quotient (VQ): 19.5%, meaning a price swing of that size is historically normal for the stock.

Cloudflare earns a stronger Quantum Score of 81.8:

NET has more solid growth rates, indicated by its 75 Fundamental score. And its Technical score of 86.7 shows just how strong momentum and Big Money buying pressure has been.

But this is a riskier stock, with a VQ of 44.5%. You’re paying for that growth and price performance with volatility. That’s not a bad thing, but it must factor into your trading plan.

Finally, let’s have a look at small-cap Fastly. It was up more than 13% on Monday after news broke that it was partnering with the RSL (Really Simple Licensing) Collective. That organization aims to set a standard for how much AI firms should pay for content licensing.

Like Cloudflare, FSLY is not turning a profit. So it gets a middle-of-the-road fundamental score of 52… but its Technical score is stronger, at 72.7:

Just be careful with this one. FSLY is a $1 billion firm with a 52.5% VQ – indicating sky-high volatility.

Switching gears, we put two big tech moves on your radar last week…

Dedicated Daily readers may be sitting on gains of 30% and 7% in two mega-cap tech stocks in just six trading days.

How?

Well, because you read our Sept. 5 issue and proceeded to buy shares of Oracle (ORCL) and Google (GOOGL), that’s how.

In the case of Oracle, we showed you how it was lighting up across four of our favorite strategies simultaneously.

Just four days later, Oracle’s shares catapulted more than 40% in a single trading session after its earnings report revealed a five-year revenue growth forecast of more than 700%.

In the case of Google, we noted that it had the highest Quantum Score of the Mag 7 tech stocks while also having the cheapest valuation.

On Monday, the company saw its AI app Gemini become the top downloaded app in the Apple App Store. This pushed it to a $3 trillion market cap for the first time.

It’s outperformed every other Magnificent 7 stock, save for Tesla (TSLA) since Sept. 5.

Congrats if you took part in these trade ideas. If you did, write in to feedback@TradeSmithDaily.com and let us know.

China’s Big AI Advantage and How U.S. Investors Can Profit