Fear has created a rare entry point in two durable, high-moat businesses.
Editor’s Note: On Thursday, shares of NVIDIA Corporation (NVDA) fell sharply after delivering exactly what Wall Street asked for, and then some.
If you’ve been reading Market 360 lately, you know I’ve been warning about this for months.
Stage 1 artificial intelligence companies – the firms building the backbone of AI – have been priced for perfection. When expectations get that high, even flawless execution can disappoint.
When you’re priced for perfection, sometimes perfection isn’t enough.
That’s why I’ve been focusing on what I call Stage 2 of the AI Dislocation: The companies that are actually building the infrastructure for AI data centers – and the firms that deliver the AI experience after the infrastructure is built.
I work closely with a sharp analyst named Thomas Yeung across our Omnia, Power Portfolio and AI Revolution premium products here at InvestorPlace. I always like to hear Tom’s insights, not only because he holds a Chartered Financial Analyst designation – but also because he’s got his finger squarely on the pulse of the AI boom, and where it’s headed.
Now, if you’re not reading Tom regularly on Sundays over at InvestorPlace Digest, you should (it’s completely free). In fact, when I learned that he would be sharing his analysis of two Stage 2 companies that are being dragged down by indiscriminate selling – even though their long-term positioning remains intact – I asked him to give us a little “preview” here today.
Here’s more from Tom.
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On Wednesday evening, NVIDIA 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 AI firms 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 firms had been thrown out with the rest of the Software-as-a-Service sector by investors ignoring their regulatory and data-heavy moats.
Since then, both stocks have risen roughly 10%, even as the Nasdaq Composite has fallen.
This is what Louis has been calling the AI Dislocation.
But the opportunity isn’t over. A second wave of indiscriminate selling is now creating even more compelling entry points for select Stage 2 firms.
Let’s look at two.
The Town Hall Tech Giant
In the mid-1990s, a little-known German software firm called SAP began selling enterprise resource planning systems to large corporations.
The pitch was simple: Consolidate payroll, inventory, finance and human resources systems onto a single platform.
Implementation was expensive. Disruptions could last months. But once deployed, 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 core operations.
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 quietly constructed the digital backbone of local government in America. Its software handles property tax assessments, court case management, utility billing and municipal financial reporting 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. They would need to 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%.
Nevertheless, Tyler’s stock has fallen sharply from its highs 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 previously, shares of Thomson Reuters also plummeted after Anthropic added a legal plug-in that can review contracts.
I find these fears overblown.
Municipal governments are not in the business of creating their own software. Barriers to entry 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 unproven vendors.
In fact, the development of AI should help Tyler sell more products. The company already uses AI solutions to automate repetitive administrative tasks, power chatbots, predict infrastructure outages and allocate resources.
Better AI should make these offerings more valuable.
Management believes it can eventually sell eight to ten products per customer, up from roughly three today.
There’s another signal here that is difficult to ignore: insiders are buying.
Over the past week, we’ve seen:
Director – Purchased 1,600 shares
Chief Administrative Officer – Purchased 610 shares
At current prices, these are meaningful purchases. In fact, the CAO’s transaction doubled her stake in the company.
Tyler’s No. 1 market position still represents only about 6% of a fragmented public-sector software market. There is substantial room for expansion as municipalities modernize aging systems.
Using conservative long-term growth assumptions, I see a target price near $500 – roughly 49% upside from current levels. And if growth trends closer to 6%, Tyler could prove to be a multi-bagger Stage 2 AI firm hiding in plain sight.
The Cybersecurity Firm AI Can’t Replace
Earlier this month, a new wave of fear swept through the cybersecurity sector.
The concern wasn’t a breach. It wasn’t a new ransomware attack.
It was AI itself.
Anthropic revealed that Claude Code Security can scan codebases for vulnerabilities and suggest patches. The company reported that its team found over 500 vulnerabilities in production open-source codebases – issues that had gone undetected for years.
There is no question that some firms built primarily around code scanning could feel pressure.
But cybersecurity is not simply about finding bugs in static code.
It’s an arms race.
And that’s where Zscaler Inc. (ZS) stands apart.
Zero-trust security systems constantly verify every user and device. They monitor every connection in and out of a company’s systems. If credentials are compromised, access is restricted to limit damage.
Zscaler sits at the center of a global security network that processes billions of events every day. Its platform handles traffic for tens of thousands of enterprise customers.
That scale matters.
When a new ransomware variant strikes a hospital overseas, Zscaler sees it. When a state-sponsored actor tests a new phishing technique against a financial institution, Zscaler sees that as well.
AI models trained on publicly available code cannot replicate real-time threat intelligence generated across a global enterprise network.
Zscaler’s advantage is not about writing code cheaply. It is about absorbing enormous volumes of live data, converting them into actionable defenses and continuously adapting to evolving threats.
In fact, artificial intelligence may increase demand for Zscaler’s services. AI creates new attack vectors – deepfake impersonations, automated phishing campaigns and accelerated vulnerability discovery.
Each new threat increases the need for zero-trust protection.
Using conservative assumptions, I estimate fair value near $260 per share – roughly 60% upside from current levels. If AI-driven demand accelerates, the upside could be substantially greater.
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.
Eighteen months later, Cisco had lost 85% of its value.
Meanwhile, a separate set of companies used the internet to build lasting fortunes. Some were quieter firms embedding themselves into enterprise workflows. Others were breakout growth names that compounded for decades.
Today, artificial intelligence is approaching its own inflection point.
Stage 1 winners built the infrastructure.
Stage 2 firms are embedding AI into mission-critical systems.
Tyler Technologies and Zscaler represent two conservative ways to participate in that shift.
But what about the growth winners – the companies that could rise 500% or more?
That’s where Louis has identified a specific group he believes still offers enormous multi-bagger upside as the AI Dislocation unfolds.
Watch the AI Dislocation presentation here.
Until next week,
Thomas Yeung, CFA
Market Analyst, InvestorPlace
