RJ Hamster
2 AI Stocks to Buy on This Pullback
2 AI Stocks to Buy on This Pullback
Tom Yeung here with your Sunday Digest.
On Wednesday evening, Nvidia Corp. (NVDA) delivered exactly what Wall Street asked for.
Revenue surged 73% to $68 billion. Data center sales hit a new record. Earnings per share sailed past analyst estimates. By every traditional measure, it was a spectacular quarter.
And yet, shares fell.
Louis Navellier has been warning about this for months. Expectations for “Stage 1” artificial intelligence companies building the physical side of AI have become so elevated that even blockbuster results can no longer satisfy them.
When you’re priced for perfection, perfection isn’t enough.
That’s why we’ve been eyeing “Stage 2” AI firms. These companies provide the experience of using AI – the products and services that come after the Stage 1 firms have done their job.
Three weeks ago, I wrote about two of these superstars: Thomson Reuters Corp. (TRI) and ServiceNow Inc. (NOW). These babies had been thrown out with the rest of the Software-as-a-Service (SaaS) bathwater by investors ignoring these firms’ regulatory and data-heavy moats.
Since then, the two stocks have risen roughly 10%, even as the Nasdaq Composite has fallen.
This is what our legendary quant analyst, Louis Navellier, has been calling the AI Dislocation.
But the opportunity isn’t over. If anything, a second wave of indiscriminate selling is now creating an even more compelling entry point for Stage 2 firms. I’ll reveal two of them today.
Now before I get to them, take a moment to watch Louis’ full AI Dislocation presentation. While I’m focused on the more conservative Stage 2 picks, he’s tracking an entire breakout group with ~500% upside. During that presentation, he shows us why investors are still panic-selling precisely the wrong stocks – and reveals his own top pick for this opportunity. Check it out here.
Let’s jump in…
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Have you seen Eric Fry on TV recently?
He’s been all over CNBC with his latest findings that Nvidia, Amazon and Tesla are ticking time bombs in investors’ portfolios. He’s a futurist known for making contrarian and highly accurate calls over the past 30+ years. Today, he’s sharing the three stocks positioned to take over as the tech kingpins of tomorrow. Get his full “Sell This, Buy That” list right here.
The Town Hall Tech Giant
In the mid-1990s, a little-known German software firm called SAP began selling its resource-planning systems to large corporations.
The pitch was simple: Consolidate your payroll, inventory, finance, and human resources systems onto a single platform. Corporations were reluctant at first. Implementation was expensive. Disruptions lasted months. But once a company deployed SAP’s systems, almost no one ever switched. The system became too embedded and too critical to tear out.
Today, six out of every seven Fortune 500 companies use SAP for their core operations, and SAP is worth $250 billion.
Tyler Technologies Inc. (TYL) has built essentially the same business… except its customers aren’t Fortune 500 boardrooms. They’re county clerks, school districts, courthouses, and municipalities.
Since the early 1990s, Tyler has been quietly constructing the digital backbone of local government in America. Its software handles property tax assessments, court case management, utility billing, and municipal financial reporting for thousands of government entities across all 50 states.
The moat here is extraordinary.
Consider what it would take for a city to rip out a Tyler-powered property tax system and replace it with a competitor’s product. Town managers would need to convince a risk-averse city council to approve a disruptive multiyear project, and then retrain hundreds of employees and migrate decades of sensitive records. They would also need to hope the new vendor’s rollout goes flawlessly. Because if the tax billing system goes dark, the city’s revenue collection stops.
This is precisely why municipal governments almost never switch software vendors. Annual customer churn at Tyler sits at just 2%, or half of SAP’s figure.
Nevertheless, Tyler’s stock has fallen 45% since last year on fears that AI will replace its business. These concerns were compounded by recent plug-in launches around Anthropic’s Claude Code. As I noted three weeks ago, shares of Thomson Reuters, too, plummeted after Anthropic added a legal plug-in that can review contracts and more.
I find these issues completely overblown.
Municipal governments are not in the business of creating their own software, and barriers to new entrants are high. Unlike Fortune 500 companies, local governments are institutionally allergic to risk. Their job is to keep the lights on and the trash collected, not to experiment with new software vendors.
In fact, the development of AI should helpTyler sell more products. The company already uses AI solutions to help automate repetitive administration tasks, run customer-facing chatbots, predict infrastructure outages, and allocate resources. Better AI will only make these products more desirable. Tyler’s management believes they could eventually sell 8-10 products per customer, up from around three today.
Then there’s another signal here that I find impossible to ignore:
Insiders are buying.
Over the past week, we’ve seen:
- Director. Purchased 1,600 shares
- Chief Administrative Officer (CAO). Purchased 610 shares
These are genuinely meaningful purchases at current $350-per-share prices. In fact, the CAO’s purchase doubled her stake in the company.
Finally, it’s worth noting that Tyler’s No. 1 market position still gives it only a 6% share of the fragmented public-sector software market. There’s plenty of room for Tyler to keep nibbling away at local governments that are finally ready to throw out their aging, decades-old IT systems for a more modern solution that includes AI capabilities.
According to my models, an extremelyconservative 3% long-term growth rate gives Tyler a target price of $500… a 49% upside from here. And if long-term growth is closer to 6%, as I expect, Tyler would prove to be a multi-bagger Stage 2 AI firm hiding right at your local town hall.
The Cybersecurity Firm That AI Can’t Replace
Earlier last week, a new wave of fear swept through the cybersecurity sector. The worry wasn’t about a new type of attack or a high-profile breach.
It was about AI itself, specifically Anthropic’s latest cybersecurity plug-in.
In a blog post, the AI firm revealed how Claude Code Security can now scan codebases for security vulnerabilities and suggest software patches for human review. Anthropic has already used the system to detect real-world coding flaws.
Here’s from the company’s blog post:
Using Claude Opus 4.6, released earlier this month, our team found over 500 vulnerabilities in production open-source codebases—bugs that had gone undetected for decades, despite years of expert review. We’re working through triage and responsible disclosure with maintainers now, and we plan to expand our security work with the open-source community.
Now, I agree that Claude Code will disrupt many cybersecurity firms, especially the ones built to scan code for errors. Firms offering “DevSecOps” tools, like GitLab Inc. (GTLB) and Palo Alto Networks Inc. (PANW), will see slices of their businesses disappear due to this new technology.
However, AI is inherently limited to the data it’s trained on.
It doesn’t have access to the real-time data that’s created every day by new attacks…
And it doesn’t have the ability to compete against Zscaler Inc. (ZS), the global pioneer (and current leader) in zero-trust security solutions.
As a quick primer: Zero-trust systems are a cybersecurity approach that constantly verifies every user and every device. It’s a monitoring system that’s watching every connection in and out of a company’s systems. In addition, if a password is stolen or a device is breached, Zscaler’s systems are designed to limit access to reduce the harm.
In other words, Zscaler’s business is not a problem you solve or a bug you fix. It’s an arms race. New attack vectors emerge constantly, and the only way to reliably defend against bad actors is to know what those attacks look like in the wild.
That’s where data comes in. Zscaler sits at the center of a vast global security network that processes billions of events every single day. The company’s platform handles traffic for tens of thousands of enterprise customers, which means it has accumulated petabytes of real-world threat intelligence that no AI model trained on publicly available code can come close to replicating. When a new ransomware variant strikes a hospital in Munich, Zscaler sees it. When a state-sponsored actor tests a new phishing technique against a bank in Singapore, Zscaler sees that, too.
Of course, artificial intelligence will someday create a competing zero-trust product. But whatever platform it builds will look much like what’s already in the market… and ZS has plenty of experience competing against both larger and smaller rivals from Cisco Systems Inc. (CSCO) to Check Point Software Technologies Ltd. (CHKP).
In other words, Zscaler’s “secret sauce” is not about writing code cheaply or detecting errors in programs. (In fact, ZS’s recent acquisitions suggest it already uses AI in its workflows.)
It’s about creating a polished product that can absorb enormous amounts of data, convert them into actions, react to new threats, and have people come and help customers when things go wrong. AI can supplement this business, but not replace it.
It’s also noteworthy that artificial intelligence will actually increase demand for Zscaler’s products. The technology opens new ways for bad actors to gain unauthorized access to company systems – from tricking users with deepfake videos to automating vulnerability discovery. Each of these new pathways will require new zero-trust tools to mitigate.
Just last week, a hacker exploited Anthropic’s own AI tools to carry out a series of attacks against Mexican government agencies. One hundred and fifty gigabytes of sensitive documents were stolen, including taxpayer records, voter information, and government employee credentials. These are the attacks Zscaler is designed to mitigate.
My models put ZS’ current value at $260 per share, a 60% upside from today’s levels. And if AI triggers a stampede of demand, we could see ZS rise 100% or more from here.
We’ve Seen This Movie Before
In March 2000, Cisco became the most valuable company in the world. It was the picks-and-shovels play of the internet boom, building the routers and switches that the whole digital revolution relied on. Investors couldn’t get enough.
Eighteen months later, Cisco had lost 85% of its value.
Meanwhile, a separate set of companies used the internet to build lasting fortunes.
- Boring winners. Some were quieter names. Salesforce Inc. (CRM) and SAP SE (SAP) operated in the background, content with grinding higher through embedding themselves in Fortune 500 companies
- Growth winners. Others were flashier growth companies. Alphabet Inc. (GOOGL) and Amazon.com Inc. (AMZN) used the internet to turn into breakout success stories. Netflix Inc. (NFLX) turned every $10,000 invested into $7.7 million.
You already know where I’m going with this.
Today, artificial intelligence is approaching its own Cisco moment. Initial Stage 1 winners are now valued so richly that even perfect execution is no longer enough.
Meanwhile, an entire new cohort of Stage 2 companies are ready to rise.
I’ve now given you four of these “boring winners” that should grind higher over time. TRI, NOW, TYL, and ZS are all conservative picks that benefit from improving AI.
But what about the growth winners? The companies that can rise 500% or more?
Louis Navellier has identified a specific group that he believes still offers enormous multi-bagger upside. His full presentation explains exactly why… and gives you one specific name to buy.
Watch Louis Navellier’s AI Dislocation presentation here.
Until next week,
Thomas Yeung, CFA
Market Analyst, InvestorPlace
