Meme stocks and cannabis were investing fads, but Morgan Stanley says AI is the real deal

What investor out there wouldn’t like to hop in a time machine and travel back to 1997 (or even earlier) and pick up some Amazon.com shares for a mere 10 cents, spotting a theme early on and riding it to the top.

Our?call of the day?from Morgan Stanley says they should not sleep through what some see as the next big thing –generative language models, such as exhibited by ChatGPT.

“In recent years we’ve witnessed a number of investing fads: From meme stocks

to cannabis to Web 3. As each narrative has cooled, theses have drifted and

fleet-footed capital has pivoted back to safety…or on to the next,” a team of strategists led by Edward Stanley told clients on Thursday.

“Generative AI, now popularized by ChatGPT, is showing all the usual hallmarks of hype: social media echo chambers, exponential venture funding and a polarized media. Yet, something suggests the AI hype is worth considering seriously…product

market fit,” says Stanley and the team.

Morgan Stanley notes the technology is “the fastest platform to a million users and fastest to 100 million site views. Hence, when we consider tech diffusion with real market impact potential (one of our key secular themes for 2023) generative AI is a serious contender.”

In what could be an early stumble on the way to greatness, Alphabet’s market cap was hit by?more than $100 billion? after Google’s Bard incorrectly answered a solar-system question. Weighing in on Microsoft’s?MSFT,?-0.31% ?own AI-chat launch,?Wall Street analysts said the company has a lot of work ahead of it.

Baidu shares?BIDU,?-4.92% ?tumbled in Hong Kong along with other AI-related companies after a China state-run newspaper?warned of hype and risks from ChatGPT-related stocks .

Morgan Stanley’s U.S. tech team has calculated a 7 times higher cost per query than paid search for ChatGPT, though that’s not necessarily a deterrent. “The speed of new product launches is ramping up, which is creating opportunities through the stack,” they said.

Venture capital, they say, is staying away, “despite the top 10 highest valued private generative AI companies being valued collectively at $30 billion.”

“Simply put, with the capital required to now keep pace with the scale-ups, many VCs conceded the horse had bolted. Opportunities seem to still lie for VCs in Generative AI’s applications, safety and moderation,” said the strategists.

Top corporate management teams told Morgan Stanley that AI integration won’t be fast. “Despite initial high hopes of cost savings, price per token (i.e. character output) remain prohibitive for many enterprise users — according to our conversations with those exploring training the large language models on their own data.”

And then there’s the debate about the future of workers and white-collar job disruption from chatbots. Will it be a creative destruction moment for companies and employees, a re-skilling catalyst, wage dispersion enabler? This could have major implications for knowledge and customer outsourcing sectors across Asia, for starters, they said.

The good news for employees? “While ChatGPT’s output is credible, accuracy is its Achilles’ heel. Manual validation should act as a breakwater to this employment threat for now,” said Morgan Stanley.

But a broader valuation rethink may also be near, say the strategists. They believe many global investors are viewing this moment as “another tipping point akin to having to disaggregate their portfolio holdings into ESG-positive narratives and ESG-negative narratives.”

Read:?‘No one is immune’: Activist investors target tech companies after stocks dive

The markets

Stock futures?YM00,?0.66% ?ES00,?0.82% ?NQ00,?1.33% ?are higher , while Treasury yields?TMUBMUSD10Y,?3.588% ?TMUBMUSD02Y,?4.425% ?pulled back. Oil prices?CL.1,?-0.90% ?are flat, the dollar?DXY,?-0.72% ?is weaker and gold?GC00,?0.42% ?is higher.

Read:?Deeply inverted Treasury yield curve isn’t signaling a looming recession: Goldman Sachs

For more market updates plus actionable trade ideas for stocks, options and crypto,?subscribe to?MarketDiem by Investor’s Business Daily .

The buzz

Disney shares?DIS,?+0.13% ?are climbing after the?media giant announced ?cost cuts and 7,000 layoffs, after reporting a big earnings beat, but a hefty drop in Disney+ subscribers. The question is, will CEO Robert Iger’s efforts?be enough ?

Robinhood Markets?HOOD,?-0.76% ?admitted to a $57 million mistake — accidentally selling Cosmos Health?COSM,?+0.80% ?short in December,?triggering an earnings miss and causing bonus cancellations.? But shares are up after the trading app said it would buy FTX founder Sam Bankman-Fried’s stock.

AppLovin?APP,?-1.32% ?stock is up 30% and set to recover more than $1 billion in lost market capitalization after the app-monetization group’s?strong forecast .

PepsiCo?PEP,?-0.23% ?shares are rising after the soft drinks giant?beat estimates , though guidance disappointed. Philip Morris stock?PM,?-0.89% ?is up after mixed results, and Hilton stock is headed towards a nine-month high after?the hotel operator’s profit more than doubled . Coach parent Tapestry?TPR,?-4.47% ?is up 5.5% after forecast-beating profit?and a guidance boost .

Canopy Growth?WEED,?-2.65% .?PayPal?PYPL,?-4.22% ,?Lyft?LYFT,?-6.58% ,?Expedia?EXPE,?-0.87% ,?Cloudflare?NET,?-0.51% ?and others report after the close.

Weekly jobless claims came in slightly higher than expected at 196,000. Deutsche Bank sees a 90% chance of recession, but the S&P 500 shooting to 5,000?if that can be avoided.

NBA superstar?Kevin Durant was traded to the Phoenix Suns .

And thousands of survivors of the deadly earthquakes that killed 17,000 in Turkey and Syria are struggling to stay warm and fed.

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The chart

More fodder for the bulls from this Bespoke Investment chart that shows “a lot of green bars” on the price chart for the S&P 500-tracking ETF?SPY,?-1.09% ?as of late.

“A green bar on a daily candlestick price chart means that price closed?higher?than where it opened that day.?It’s indicative of intraday strength,” notes Bespoke, which adds that SPY has seen intraday buying in 12 of the last 13 days as of Wednesday. The last time 13 up days happened was in April 2021. More important, green bar stretches don’t tend to happen during bear markets, they say:

The tickers

These were the most active stock-market tickers as of 6 a.m. Eastern:

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