The AI conundrum
The last couple of week saw all of the AI related gains drop at a steep rate. It’s earnings season and looks like Wall St. does not like it when billions of $ of investment do not give you the return they expected to see.
META, Google and Microsoft earnings came out with solid earnings. All three announced strong growth, profitability was strong - there was a lot to like. However, that did not do any favors to their stock the next day with the exception of META. The common theme across all earnings call was the fact that Wall St. asked the common question of the billions all the three companies were investing in artificial intelligence (AI).
This quote from Sundar Pichai, the CEO of Google sums it up for me:
”The risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where it turns out that we are over-investing."
We also heard from Susan Li, the CFO for META:
"While we do not intend to provide any quantitative guidance for 2025 until the fourth quarter call, we expect infrastructure costs will be a significant driver of expense growth next year as we recognize depreciation and operating costs associated with our expanded infrastructure footprint,"
In Silicon Valley it all comes down to the startup mentality. And I see this in Pichai’s statement too. Not just Google, but Microsoft and META are ready to make a mistake, burn a boatload of cash making the mistake; rather than miss out on a potentially huge opportunity and in doing this capture as much market as possible (IMHO, this approach what makes Silicon Valley successful).
The difference was that META seems to have a clear understanding on which areas can AI help them the most:
- They are well positioned to drive value with [generative AI] for advertisers
- We already see AI based avatars and chat bots on social medias like Facebook, Instagram and WhatsApp.
This simply means that unless there is a clear winner, clear business model defined for AI and we see revenue generation that we like, all three of them are committed to spend billions on AI. Hence, for the time being, this is going to benefit and improve the bottom line of companies that deal with AI related hardware (like $NVDA) which will see strong growth for the next few quarters.
This does not mean that investments in AI aren’t worth it for these companies or us investors. It simply means that we need to take the long view. We all think everything in tech moves fast; however, our expectations for AI are getting ahead of reality. AI won’t fundamentally change the way we live our lives; but its use will benefit our productivity drastically. For that to happen, we need to ensure we are putting resources behind companies that have a defensible moat, and comes out with product and features that will help move the needle.
And while I was writing this article, I got a notification that new Apple BETAs were available for developers that bring some Apple intelligence features.
Apple's approach to their AI is in stark contrast to META, Google, Microsoft & others - move slow, make sure everything works, make progress and delight customers.
In the past they have never been the first to market on many features and have been slow to adopt new technology. But, when they finally show up on the phone, you cannot stop using it.
The amount of features that will be available in October 2024 can't be compared to the amount of AI related stuff any of the other companies are doing. But the tight integration that Apple brings with its ecosystem makes it work and feel organic.
Always long $AAPL.