Will artificial intelligence supercharge corporate profits and create a new legion of tech giants?
Probably. But over the past week, investors made clear that they think it will happen later rather than sooner.
During the first half of this year, Wall Street sent tech shares—and those of many other businesses, for that matter—soaring on the hope that the hundreds of billions of dollars they’ve spent so far on AI would pay off quickly. Companies that played the AI game right would soon enjoy a windfall of cost savings and extra profits, or so the theory went.
But then a funny thing happened this week: The Nasdaq nosedived as much as 5% after Wall Street started worrying that the expected AI utopia may not materialize as quickly as initially believed (tech shares recovered somewhat in mid-day trading on Friday). You see, most companies betting the bank on AI have little financial benefit to show from it so far.
Alphabet CEO Sundar Pichai was unusually candid about the current spend-now-ask-questions-later mentality permeating the tech sector. In a quarterly earnings call with analysts on Tuesday, he brushed off any criticism of his company’s ballooning AI bill, saying, “When we go through a curve like this, the risk of under-investing is dramatically greater than the risk of over-investing for us here.”
Investors cringed. Despite Alphabet’s better-than-expected earnings, its shares, as of mid-day Friday, had fallen 6% this week.
Next week, Meta, Microsoft, Amazon, and Apple will also be in the firing line over earnings. It’s a good bet Mark Zuckerberg, Satya Nadella, Andy Jassy, and Tim Cook will also have to defend their big spending on everything AI.
Don’t get me wrong—I’m no Debbie Downer about AI. It will be hugely transformative for business, from handling back-office chores to taking notes for doctors when they see patients. But I’m also a realist. Most companies are still in the very early stages of deploying the technology and wider rollouts will take time, especially considering the very real risks of hallucinations and inaccuracies. Most of the promised financial benefits—the workforce synergies, to cite one corporate euphemism—will likely come much further down the road.
Sure, there are a handful of exceptions, mostly involving companies selling the basic tools that customers need to deploy AI. Those obvious winners include chipmaker Nvidia and big cloud service providers Alphabet, Microsoft, and Amazon, although they’re also having to invest huge amounts of money to expand their data centers to keep up with demand.
So is Wall Street right to be nervous about its initial bet on a quick payoff for AI? Yes. As history shows, tech is indeed transformative, but over the longer term. Online retailing, for example, took years to become viable after the Dotcom crash, wiping out many investors in the process. Meanwhile, video streaming and social media also took their sweet time due to initially slow consumer interest in watching movies online and glitchy technology for connecting with friends. AI is no different in that it won't necessarily adhere to Wall Street's timeline.
Verne Kopytoff
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Today's edition of Data Sheet was curated by David Meyer.
