AI Hype Is Hyper
Jackie Doherty & Ed Yardeni
This is an excerpt from Yardeni Research Morning Briefing, July 2, 2024. Here is the link to our Disruptive Technologies Briefings.
Determining when an investment trend has run its course is more of an art than a science. While we love the productivity-enhancing possibilities that artificial intelligence (AI) offers, the AI phenomenon has many of the hallmarks of an inflating bubble. There are big bucks chasing the AI dream. New kings of industry have been crowned. And the hyperbole is flowing.
?Let’s take a look at some of the warning signs we’re watching:
?(1) Funds are flowing. We’ve been big fans of AI and what it can accomplish. This year alone, we’ve highlighted AI that trains autonomous cars; develops drugs, plans weddings, and tickets drivers; helps teachers develop lesson plans and grade papers; and aids Madison Avenue’s advertising pros write copy and create videos.
?But at some point, too much capital can end even the best of parties. There are hundreds of small companies that have raised billions of dollars from venture capitalists hoping to discover the next ChatGPT. Investors have poured $330 billion into 26,000 AI startups over the past three years, which is two-thirds more than was spent funding 20,350 startups from 2018-20, according to an April 29 NYT article citing PitchBook data. Likewise, generative AI deals attracted $21.8 billion last year, up fivefold from 2022, according to CB Insights data in an April 29 WSJ article.
Many AI newcomers have yet to turn a profit. The NYT highlighted a number of companies that were running out of funds, including Stability AI, which has laid off employees and watched its CEO depart. Inflection AI raised more than $1.5 billion to develop a chatbot that gave emotional support to its users, but its CEO and much of his staff left for Microsoft.
Fortunately, most of these companies haven’t borrowed debt in the capital markets, so a repeat of the telecom bust is unlikely. But if AI startups run out of cash, their suppliers could find AI-related revenues dry up quickly.
(2) The AI kings talk big. Like every hip new tech industry, the AI world has its rockstars, including Nvidia’s Jensen Huang, ChatGPT’s Sam Altman, and Tesla’s Elon Musk. Some sound like they’ve drunk too much AI Kool-Aid.
At Nvidia’s annual meeting last week, Huang noted that the Blackwell architecture platform may be the most successful product in the history of the computer, a June 26 Investopedia article?reported. We have no doubt that Blackwell will be extremely successful, but we don’t believe the semiconductor cycle is dead.
When semiconductor industry demand is strong, customers scramble to get their hands on chips, often over-ordering in anticipation of their entire order not being fulfilled. Once customers receive the chips they need, orders drop abruptly and manufacturers and wholesalers find themselves with excess inventory. AI may help manufacturers operate more efficiently, but it won’t change human nature.
Huang also noted that the company’s business was about to expand into the robotics and the sovereign AI businesses. “The next wave of AI is set to automate the $50 trillion in heavy industries” with robotics factories that “will orchestrate robots that build robots that build products that are robotic,” the Investopedia article stated. The robotics industry already has many large, established companies, like Fanuc and Boston Dynamics, that are automated and using AI to improve their robots’ capabilities.
Not to be outdone, ChatGPT CEO Sam Altman at the Aspen Institute Ideas Festival compared the rise of AI to the discovery of agriculture and the invention of industrial-era machines. He claimed that AI will dramatically increase productivity and help global GDP grow 7% annually to double within 10 years. While we concur with Altman that AI will enhance productivity and boost economic growth, doubling the size of the world economy in a decade is quite a claim.
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I don't think this is as speculative as the Internet was, since the largest corporations are already implementing AI. AI is more of an overlay than a totally new industry at this point for many established corporations. That said, suppliers like Nvidia will eventually fall somewhat to competition just as Cisco did and the new winners will be those who best supply AI to consumers and businesses through goods and services, as Apple and Microsoft will and are doing. Along the way, some new winners will emerge and many small cap AI stocks with crazy valuations will flame out. Hopefully investors will learn from the internet craze of the late 90s. I don't think AI is exactly the same as the more opaque internet craze of that time but it may rhyme a bit.
Self Employed Independent Financial Consultant-Writer of The Macro Butler Substack
8 个月Edward Yardeni Dark pool trading and Artificial Accounting are among the signs that should raise questions about whether AI's profits are real or artificial. https://themacrobutler.substack.com/p/dark-pooled-artificial-accounting