This Stock Was Sold as an AI Loser. Then Came Muse.
Your AI will call their AI. Here’s the stock I’m buying for that.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
It is ugly out there again Thursday morning, but there is some improvement after the gap-down open. Breadth is running about 42% positive, and bonds are perking up, but oil is higher and the liquidation in biotechnology continues. Semiconductors and data centers are under pressure.
The degrossing in biotechnology has produced some of the most relentless selling I can recall in stocks that have had no change in fundamentals. Many of the experts in the sector see some exceptional opportunities developing, but trying to catch these falling knives is dangerous. There are a number of names I want to buy aggressively, and I’ll keep you posted when I’m ready to move.
While waiting for the biotechnology sector to stabilize, I’m taking a look at how AI leadership is shifting. For most of the past year, the trade was simple. Investors bought the companies building AI and sold the companies they thought AI would replace. Chip makers and the rest of the infrastructure group ran, and software was hit hard. The iShares Expanded Tech-Software Sector ETF (IGV) fell 35% from its high last September to its low in February, and by this spring chip stocks were beating software by the widest margin on record.
It was a blunt trade. It didn’t matter much what a software company sold or how its business was doing. If it was software, it was dumped.
The Shifts Are Now Stock by Stock
That software trade is changing. On September 14, software stocks had their best day against chip stocks in 25 years, a sign that money is starting to move the other way. Then Meta Platforms (META) gave us a look at what comes next. Its Muse personal AI agent, launched on September 8, caught fire, and the market went to work picking winners and losers one company at a time.
Shopify (SHOP) and Twilio (TWLO) jumped. Banks, insurers and travel sites were sold on the fear that an agent that shops around for you is bad for any business that depends on customers who don’t. Even those calls didn’t hold for long. Twilio rose about 30% in less than three weeks and then drew a downgrade from HSBC, which questioned how much of the Muse traffic the company will keep.
A market that is deciding company by company, and changing its mind this quickly, is going to misprice some of them along the way. Five9 (FIVN) is a good example.
Sold With the Group
Five9 makes the software that runs customer service call centers. When you call your bank or your insurer, software like this picks up, sends you to the right person and, more and more often, lets an AI voice agent handle the call.
It was an easy stock to sell because of its business model. Five9 is paid for each human agent using its software, and AI answering the phone means fewer agents. The stock traded near $13 within the past year on the idea that the humans would all disappear.
Despite that theory, subscription growth has picked up for three straight quarters, the traditional business is still growing, and AI revenue grew 78% in the second quarter. Five9 sells the AI agents too, and it is signing customers to multi-year spending commitments that let them shift between people and AI, so the dollars stay with Five9 even if the humans disappear.
A stock that was sold as an AI loser is starting to look like it belongs on the other list.
Then Came Muse
Five9 jumped on the Muse wave. If millions of people hand their errands to an agent, the companies on the other end are going to hear from their customers more often, because it costs nothing to have an agent dispute a bill or chase a refund. Those companies will need AI on their side of the conversation, and that is what Five9 sells.
Morgan Stanley said agents like Muse could expand communications volumes, although it named Twilio as the stock best exposed and called it a medium-term story rather than a reason to raise estimates now.
Back Where It Started
Five9 has given back the entire breakout on the Muse news and closed Wednesday around $34, about where it traded before anyone connected it to Muse. It is sitting on its 50-day moving average, and the business that was improving before Muse came along hasn’t changed.
The stock trades at about 14 times this year’s expected free cash flow. I’m paying for the company that was already getting better, and whatever Muse turns out to be worth comes along for nothing.
The risk is the third-quarter report in early November. Earnings dipped last quarter because Five9 added staff to get AI customers up and running faster, and management needs those costs to come off to hit its forecast for the year. I want to hear that they are.
My Plan
I own some Five9, and I’m using the pullback to add to it in small pieces. The 50-day gives me a clear place to manage risk. If the stock holds there, I’ll keep building, and if it breaks decisively, I’ll cut back and wait for it to find support. I don’t plan to carry a big position into the report.
The AI trade used to be about picking the right group. Now it is about picking the right stocks, and I like that game.
At the time of publication, Rev Shark was long FIVN.
