The industry has rushed head-long into AI, and stock market investors are following them. But a growing number of analysts are skeptical.
Artificial intelligence (AI) is the new gold rush, with billions being poured into it by Big Tech, stock market investors, and venture-capital firms. However, a growing number of Wall Street analysts and tech investors are raising concerns about whether this investment frenzy is leading to a financial bubble.
The Investment Surge and Rising Skepticism
On Tuesday, during Google’s quarterly conference call, CEO Sundar Pichai faced numerous questions about when the company’s $12-billion-a-quarter AI investment would start yielding returns. This scrutiny follows reports from major financial institutions like Goldman Sachs and Barclays, as well as venture-capital giants like Sequoia Capital, questioning the sustainability of the AI boom. Despite substantial investments, the technology’s financial returns are uncertain, with stock prices for AI-heavy companies like Google, Microsoft, and Nvidia seeing significant rises this year.
Diverging Opinions on AI’s Future
Jim Covello, a senior stock analyst at Goldman Sachs, cautioned against overbuilding AI technology that the world isn’t ready for. This contrasts with a previous Goldman Sachs report predicting AI could automate 300 million jobs globally and boost economic output by 7% in the next decade. Barclays analysts echoed this skepticism, estimating that Big Tech companies might spend $60 billion annually on AI development by 2026 but only generate $20 billion in revenue from it.
The AI Boom: A Mixed Bag
OpenAI’s release of ChatGPT in 2022 ignited the AI race, with companies like Nvidia benefiting massively. Venture capitalists have also invested billions in AI start-ups, contributing to a record $55.6 billion in U.S. start-up investments in Q2 2024. Yet, tech executives, including Pichai, argue that AI will revolutionize life, much like the internet and mobile phones did.
Challenges and Potential
Vinod Khosla, a prominent venture capitalist, likened AI to previous transformative technologies. He acknowledged that while a financial bubble might form, the technology itself would continue to evolve and become integral to society. Khosla predicted the emergence of trillion-dollar AI businesses in fields like humanoid robots and AI assistants. However, the current returns on AI investments remain modest, with venture capital exits falling slightly to $23.6 billion in Q2.
The Reality of AI Investment
Despite promising revenue growth in cloud businesses driven by AI, only a few stand-alone products like ChatGPT and GitHub Copilot have achieved significant success. The high costs of developing and running AI programs are expected to decrease as competition increases and technology becomes more efficient. For now, companies like Egnyte see AI’s value proposition but believe current market expectations are unrealistic.
The Road Ahead
While larger companies like Google and Microsoft can sustain high AI spending, smaller start-ups may struggle. The AI industry’s future will depend on managing investment expectations and overcoming regulatory and legal challenges. As Vineet Jain of Egnyte put it, the AI investment frenzy is like a soufflé that must eventually settle.
In summary, the AI gold rush is a complex mix of immense potential and significant risk, with the industry needing to balance investment with realistic expectations to avoid a financial bubble.
Link to article:
https://www.washingtonpost.com/technology/2024/07/24/ai-bubble-big-tech-stocks-goldman-sachs/
Credit: The Washington Post, July 24, 2024