Was the stock market drop the first sign of an AI market disappointment?
There’s an interesting undertone in the massive stock market decline, especially the drop in the value of big technology companies.
It seems like the market might not have the same excitement for investing in artificial intelligence as the tech CEOs are:
Has the AI bubble burst? Wall Street wonders if artificial intelligence will ever make money
It seems like Wall Street didn’t like the revenue updates:
Amazon’s (AMZN) less-than-impressive earnings and outlook Thursday could be mostly chalked up to concerns that it is spending a ton on AI without much to show for it, at a time when its core business also faces hurdles. That dragged the stock down nearly 9% Friday. Intel’s (INTC) stock plunged 25% on Friday after the company said Thursday night that after big spending to adapt to the AI wave, it’s now trying to rein things in by cutting $10 billion in costs and laying off tens of thousands of workers.
Microsoft and Google also saw stock prices drop after their earnings calls. Stockholders do not see the return on all of the investments made in AI, and they are wondering when, if ever, there will be a suitable return. Meanwhile, the tech companies say it might be years before the business model becomes profitable. This quote might be the best explanation I’ve seen yet because it makes clear that the idea of burning through cash while creating something new might have worked for some companies in the early days of the internet, but they didn’t have public stockholders:
“If you’re going to invest now and get returns in 10 to 15 years, that’s a venture investment, that’s not a public company investment,” Luria said. “For public companies, we expect to get return on investment in much shorter time frames. So that’s causing discomfort, because we’re not seeing the types of applications and revenue from applications that we would need to justify anywhere near these investments right now.”
I think that’s right. It was one thing when venture capitalists invested millions in social networks and gig-economy startups. Microsoft, Google, Amazon, Intel, etc., are not startups. They are publicly traded companies. Investing billions of dollars with the promise that it will turn a profit in about 15 years puts a damper on shareholder value. This isn’t a question of how much patience a venture investor has in the company; our 401(k) and personal investments are devalued in the hope that it will make money in 10-15 years. Who has 10-15 years to wait and see?
That’s why the prices have dropped. Investors do not see as much short-term value and are looking to get out in exchange for something that will have more value in 2024-25.
The question is, can the large tech companies come up with a clear explanation of where AI is going that will convince shareholders that there is long-term value? So far, I don’t think they have, and I say that as someone who generally likes some of the AI tools out there. I think they are reasonably helpful around the edges of my work. They cut time out of my research efforts and helped me with writing. They haven’t changed the world, and it’s not clear that they can do that in their present form. Without that, what are the billions in investment and all the electricity usage for?
Big tech will need a better answer to that question than it has, or investors will walk away even more than they did last week.
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