Editor's note: Investors loved hearing that companies were spending on AI...

But that's all changing now. They want to see that investment turn into revenue. And the market is punishing businesses that fall short. But for others, they're being rewarded because of one distinction that sets them apart.

In today's Masters Series, adapted from the August issue of True Wealth, editor Brett Eversole explains why AI spending in and of itself isn't good enough anymore – and how the companies that can utilize it properly could be the big winners in the next phase of the AI build-out...

AI 'Phase 2' Will Filter Out the Real AI Businesses

By Brett Eversole, editor, True Wealth

Investors have lost their patience. It's time to put up or shut up.

Before, spending was good enough. Investors rewarded companies simply for pouring more and more cash into AI.

They were building... and building was enough to get the boom started. Investors weren't concerned with what that spending would turn into. Simply spending to develop AI was all they cared about.

Today, we have a new paradigm.

Investors won't settle for promises anymore. They want to see all that spending turn into something. They want a return on that investment.

In short, it's not enough to just be an AI builder... Investors want sellers.

That's clear from how folks reacted to a recent string of earnings reports.

Hyperscalers like Amazon (AMZN), Microsoft (MSFT), and Meta Platforms (META) have been some of the biggest AI builders. And they're still spending like crazy. They're each putting $100 billion-plus into AI data centers this year.

In their most recent earnings reports, all three companies announced plans to increase their spending. But the day after each report, how their stocks reacted to the news formed a clear divide...

• Amazon: Up 15%

• Microsoft: Up 16%

• Meta: Down 8%

Why the huge spread? Simple... Amazon and Microsoft are selling AI. Meta isn't.

Amazon and Microsoft each own massive cloud-computing businesses. So they're spending hundreds of billions of dollars to build AI data centers... but that investment improves what they already do. It allows them to offer AI products to their massive customer bases.

Essentially, AI spending fits into their existing businesses... So it's turning into revenue.

Meanwhile, Meta doesn't have a cloud business. Most of its earnings come from advertising. The best it can do with AI so far is try to build better advertising algorithms. And right now, investors view the company's investment in AI data centers as happening "just because."

"Just because" was fine last year. But not today. And if Meta can't find a way to turn its build-out into AI-related revenue, its stock will keep struggling.

This tells a simple story. Investor attitudes have changed. Building on its own isn't good enough anymore.

This dividing line is exactly what we've expected. It's a continuation of the new market environment that began this year... what I've been calling AI "Phase 2."

Phase 1 was about building. That hasn't gone away... Building is still the core of the AI boom. And we should see trillions more dollars in spending in the coming years.

AI Phase 2, though, is all about selling AI products. And now, the hyperscalers need to turn their building activity into AI sales.

We've come to the "show me the money" moment. If companies don't deliver, they'd better watch out... because investor patience is gone.

The market is separating the winners from the losers. And that's a good thing.

That's because this is a virtuous cycle for the entire AI boom.

As we see more Phase 2 winners, spending increases... which fuels the ongoing build from Phase 1... which means many of the biggest AI winners can keep soaring.

AI Phase 2 makes future spending near certain – because the payoff is clear. That's a healthy environment. Instead of "what ifs" blindly driving spending, future investment is fueled by results.

The AI boom is far from over. With that in mind, our next move is clear...

We want to buy the companies that are benefiting from that virtuous cycle of spending.

These companies are selling the "picks and shovels" as the AI build-out continues. And they'll collect from the hyperscalers' continued spending.

Importantly, these picks-and-shovels companies will continue making money while hyperscalers like Amazon and Microsoft battle it out. To them, it doesn't matter who wins – as long as they can keep supplying the build-out.

Good investing,

Brett Eversole

Editor's note: The next stage of the AI boom is upon us. With Anthropic preparing to launch its IPO, Brett believes this could be the catalyst for one last "AI Melt Up" that he compares with Netscape's IPO in 1995.

But chasing the current leaders won't be enough. The market is changing the rules of the game, and only the companies that catch on will be able to soar. That's why Brett is stepping forward to reveal the businesses you should know about right here.