Artificial intelligence has the potential to disrupt nearly every industry on the planet. For investors navigating a world where AI could upend business models and disrupt companies, here's some advice from Amazon founder Jeff Bezos: Think about "what's not going to change."
Fancy AI tech isn't going to change the value of a good bargain or the power of iconic brands. Costco (COST 0.17%), Coca-Cola (KO 1.50%), and McDonald's (MCD -0.05%) are three companies that should have no trouble thriving in the AI age, and they're all solid long-term investments.
Costco
AI has the potential to disrupt the retail and e-commerce industries through automation and personalization, but all the technology in the world won't change the simple fact that people love a bargain. Warehouse club Costco provides bargains in spades.
Costco's growth is finally starting to cool off as consumers continue to be pressured by elevated inflation and rising interest rates. Costco's overall comparable sales slumped by 0.3% in May, and e-commerce sales were down 7.6%. Even so, Costco is in a better position than most retailers to ride out this storm.
Costco generates $4.4 billion in membership fees annually, and its customers are happy to pay the price of admission. In the U.S. and Canada, renewal rates currently sit at 92.6%. While a recession could see some customers drop their Costco membership, it could also drive new customers to the warehouse club in search of lower prices.
Costco isn't a cheap stock, trading for nearly 40 times 2022 earnings. That's a historically high valuation for the retailer, and it may not hold as the economy sours. But if you're a long-term investor looking to buy and hold for many years, it may be worth paying a premium. Costco is unlikely to be disrupted by AI or anything else, and the company should hold its own in a recession.
Coca-Cola
Brands are powerful. Coca-Cola's brand is so powerful that its core product, sugary soda, has flourished for decades despite the well-known health consequences of heavy consumption.
AI can do a lot of things, but it can't drive sales and create customer loyalty like a strong brand. Coca-Cola's brand has helped the company pass off higher costs to consumers without issue. In the first quarter, organic revenue grew 12% thanks almost entirely to pricing and product mix. Even with inflation hitting consumers' wallets at the grocery store, trading down in the soda aisle is just not happening.
Coca-Cola does offer plenty of non-soda products as well, providing some diversification. The company has a presence in sports drinks, coffee, tea, water, juice, dairy, and plant-based beverages, and it owns solid brands like Powerade, Topo Chico, and Dasani.
Like Costco, Coca-Cola stock is fairly expensive. Shares of the beverage giant trade for about 24 times adjusted earnings. But the premium that Coca-Cola stock fetches is well deserved. There are few brands more iconic, and the company is unlikely to be disrupted. Coca-Cola has long battled cheaper alternatives and prevailed every time.
Warren Buffett's Berkshire Hathaway has owned the stock for decades. While investors shouldn't blindly copy Buffett, the iconic investor is often right when it comes to picking stocks with durable competitive advantages. Coca-Cola has thrived through multiple technology revolutions, and AI isn't going to slow it down.
McDonald's
Fast-food chain McDonald's could benefit from the rise of AI, although it may take a while before the technology delivers on its potential. McDonald's is testing out an AI ordering system at several drive-thrus, and it's not exactly going as planned. Accuracy rates are reportedly around 80%, low enough to cause frustration for customers.
Even if McDonald's never quite figures out how to integrate AI effectively at its restaurants, the company should do just fine. In the world of fast food, McDonald's is king. The company has one of the most well-known brands in the world, strengthened by a dual focus on value and quality. The chain made the switch away from frozen beef for its premium burgers a few years ago, for example, which helped boost sales.
Other fast-food chains could turn to AI to improve their operations, but that likely won't be enough to dethrone McDonald's. And if consumer spending weakens in a tough economy, McDonald's becomes a more appealing choice than pricier chain restaurants thanks to its affordable options.
McDonald's generated adjusted earnings per share of $10.10 in 2022, putting its price-to-earnings ratio at about 28. Like the two stocks above, McDonald's trades at a premium. But a powerful brand and long track record of dominating the fast-food industry make the stock a solid long-term buy.
