AI Continues to Seduce

For the full version of the newsletter and better insights...Sign up here to receive Lockstep's Daily Catchup — directly in your inbox.

Company News ?

Yesterday, Lee Enterprises (LEE) released its full-year (FY) 2023 results.?For an analysis of the results, click here.

Advanced Micro Devices (AMD) and Alphabet (GOOGL) drove Thursday’s positive market performance. Both had positive news yesterday:

AMD Launches New AI Products

AMD launched a new generation of AI chips and products on Wednesday, with companies such as Microsoft, Meta Platforms, Oracle and others set to use them. While Nvidia (NVDA) controls much of the market, AMD believes it could generate well north of $2 billion in revenue from AI next year. AMD’s total revenue is currently just north of $20 billion; therefore, AI chips could add a little over 10% to the company’s revenue.

AMD’s operating income is approx.?$700 million and is?valued at 300x the current operating income, so even if operating income doubles or even triples in the next year because of these new chips, AMD is still grossly overvalued. Therefore, we remain weary of the hype around AI and its value to the company’s bottom lines.

GOOGL Upgrades Its AI.

GOOGL launched a new AI platform called “Gemini” yesterday.

It is not clear how GOOGL will monetise Gemini; however, Microsoft (MSFT) recently launched its OpenAI-powered product “Copolit”, which will be available for $30 per month, which analysts estimated could add $10 billion in revenue to MSFT by 2026 (less than <5% of total revenue). If GOOGL’s AI products can do the same, it will equate to less than 4% of its total revenue.

The critical question is what margins these AI platforms generate to determine how they will impact GOOGL’s bottom line. We don’t believe there is enough information to forecast this, but based on current margins, it would equate to roughly 4% of additional operating income. If accurate, then we should continue to proceed cautiously regarding investing in AI.

This is a condensed version of Lockstep's Daily Catchup Newsletter. For more details plus references to sources, sign up here and receive the full newsletter directly in your inbox.