For the bubble to be a boom, AI will have to be monetised
While Google, Meta, Microsoft and Amazon battle it out in the artificial intelligence (AI) race, we all know Nvidia is raking in billions, selling them the GPUs they require while simultaneously sending its market cap into the US Trillion-dollar club alongside its major customers.
Seven mega-cap companies, Meta, Apple, Microsoft, Alphabet, Nvidia, Amazon and Tesla are responsible for 100 per cent of the gains in the U.S. market, despite laying off thousands of employees amid a major business downturn. They have returned 50 per cent, while an MSCI Index excluding these seven companies has been unchanged since the beginning of the year.
The big question is how Nvidia’s customers will recover the US$40,000 per chip they are spending on tens of thousands of chips and monetize their AI investment. Two companies have recently offered some insights with Meta (formerly Facebook) and Google, suggesting they are making significant strides in the integration and security of AI in their products and services.
Meta CEO Mark Zuckerberg announced plans to incorporate AI text, image, and video generators into its flagship products, including Facebook and Instagram. This indicates a significant shift towards generative AI technology within Meta’s product suite. Tellingly, Zuckerberg emphasised that these implementations align with the company’s metaverse expansion efforts rather than replacing them.
Customers will soon be able to modify their own photos using text prompts and share them on Instagram Stories. Messenger and WhatsApp will see the introduction of AI agents with distinct personalities and capabilities, designed to assist or entertain users. In addition, an internal hackathon, to be held in July, will focus on generative AI.
As part of its commitment to the broader AI community, Meta also pledged to continue publishing research and sharing AI technologies with the open-source community.
Interestingly, Zuckerberg highlighted a stark contrast between Meta and Apple’s visions for virtual reality, underlining Meta’s focus on active, interpersonal connection rather than the solitary experiences implied in Apple’s recent Virtual or Augmented Reality (sorry, “Spacial Computer”) headset.
Further, Meta has taken initial steps into the world of microblogging by previewing Project 92, a potential Twitter rival for Instagram.
But importantly for investors, the announcements offer precious little insight into how, other than by wowing, and therefore entrenching existing customers, any of the advancements will increase revenue or profits for Meta.
Meanwhile, Google has put some more meat around its Secure AI framework to help organisations apply basic security controls to their AI systems and guard them against cyber threats. Cybersecurity takes a back seat in a technology arms race or land grab, so Google has emphasised that many AI risks can be managed with basic controls. But again, there isn’t much to suggest augmenting existing systems with AI will augment revenue for Google.
Google’s framework encourages organisations to extend existing security controls, such as data encryption, to new AI systems, broaden their threat intelligence research to include specific threats targeting AI systems, integrate automation into cyber defences to rapidly respond to suspicious activity targeting AI systems, regularly review the security measures in place around AI models, continuously test the security of AI systems through penetration tests, and build a team knowledgeable about AI-related risks to determine where AI risk should fit into the company’s overall business risk mitigation strategy.
Google’s Chief Information Security Officer, Phil Venables, suggested that many of these security practices are already in use in mature organisations. An investor may therefore ask, how does this increase revenue or profits? Google is simply collaborating with its customers and governments to encourage the adoption of these principles.
There’s little doubt AI is beginning to reshape our digital landscape, but at the moment, AI remains something of a novelty, much as the release of Apple’s App Store saw everyone turn their iPhones into a torch.
Companies like Meta and Google are driving to integrate AI into everyday applications while ensuring it’s anchored in security. These don’t initially appear to be revenue-enhancing. And wider adoptions may only benefit the consumer more than the companies offering AI enhancements.
The wide divergence between the booming share prices of Nvidia’s major customers and pretty much every other stock will need to be supported by more than hype. In the absence of a P/E re-rating across their market, substantial growth in revenue and profits will be essential to sustain the heady gains recently experienced. And so far, there’s little being said about revenue to justify the enthusiasm.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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