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Generative AI is a bubble whose time has come

Assif Shameen
Assif Shameen • 10 min read
Generative AI is a bubble whose time has come
ChatGPT uses AI to produce human-like responses to search queries based on data from the internet / Photo: Bloomberg
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Unless you have been hiding under a rock or living in some deep dark cave without Internet access for the past 12 weeks, you have probably heard far too much about AI-powered ChatGPT. The natural language chatbot has been wowing the tech world with its ability to do everything from composing college essays to writing complex computer code.

Although around the same time, a handful of art-related AI programs like DALL-E 2 had begun to proliferate on Instagram and other image-oriented sites, it was ChatGPT, created by the start-up OpenAI — backed by Microsoft — that somehow caught most people’s imagination and investors attention.

Because a lot has been written about it, and there is so much hype around it, I will try to stick to the basics. Generative AI aims to understand and predict information from a particular data set.

It is an old tool that has only recently started to ramp up. You may have probably come across it as it was previously used in applications like email as smart compose, which allows the email program to finish sentences started by a user.

ChatGPT uses AI to produce human-like responses to search queries based on data scooped up from the internet. Ask it to solve a complex math question, and it will do it in seconds. You can also get instant translation into English of text in a foreign language like French or German, or Portuguese, for that matter. You can ask it to write a story, a poem or lyrics for your next song. ChatGPT’s written story may not have any spelling mistakes, and its lyrics might rhyme, but if you read carefully, you might find that some, or most, just don’t make sense.

You can even ask it to pick the best high-growth stocks. Don’t be surprised if it recommends many pump-and-dump penny stocks no one has heard of. Or you can give it an inventory of what’s in your refrigerator and kitchen cabinet, and it will promptly spill out recipes that use only those contents.

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What makes generative AI special is just how quickly it has gone viral. In its first two months, ChatGPT attracted over 100 million users. UBS internet analyst Lloyd Walmsley notes that it took viral short-form video platform TikTok about nine months from launch to reach 100 million users, while Meta Platforms’ Instagram took about two and half years to get to 100 million users. “We cannot remember an app scaling at this pace,” Walmsley noted.

Little wonder, then, that Wall Street has been comparing the arrival of generative AI that creates content to Apple’s launch of the iPhone just before the start of the global financial crisis 15 years ago.

With supply chain concerns, persistent labour shortages and high inflation in the aftermath of the pandemic shutdown, the world is looking for new products and services that will help lead it out of the current slowdown to the next phase of growth in 2024 and beyond. Venture capitalists (VCs) and tech investors who have borne the brunt of the new higher interest rates for a longer environment see a glimmer of hope in ChatGPT and other generative AI services.

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Wall Street starts building a business case when it gets too excited about technology. Walmsley says that he’s heard VC investors speculate that the market for generative AI applications could be as large as US$1 trillion ($1.34 trillion). He notes that the world has over one billion knowledge workers; OpenAI charges US$42 a month for the professional version of ChatGPT.

Assuming every one of those knowledge workers, whether working from home or in an office, gets two accounts — one general and one specialised — you add up to a figure not far from US$1 trillion.

The next new thing?

In reality, there aren’t a billion people on earth willing to pay US$42 annually for anything, let alone a souped search engine that pretends to be slightly smarter than Google. What’s becoming clear is that generative AI is being built up as the saviour of the global economy, just as the iPhone was after the 2008 financial crisis. Wall Street is always looking for the next new thing. It happens all the time.

Yet, the iPhone wasn’t just another cellular phone. It was a handheld computer and communications device that could surf the net, play music, watch videos, send and read email, take photos, store documents, play video games and make phone calls like other cellular phones. Groundbreaking as it is, ChatGPT can’t be compared with iPhone or other smartphones that came along in its wake.

The way I see it, the generative AI boom is becoming more of a stock market bubble. Over the past few weeks, the number of AI-related stocks has doubled, tripled, corrected a bit, and bounced back a few days later. Take c3.ai, a firm that develops software for Enterprise AI applications. Its ticker symbol on Nasdaq is AI.

The company was listed on Nasdaq in December 2020 at US$42 a share. On the first day, the stock soared to over US$100. Within weeks the stock had risen to US$183, or four and half times its IPO price. But by last December the stock had gradually fallen to US$ 10.16 or 93% from its peak two years earlier. Then suddenly, ChatGPT arrived and created a new narrative for AI stocks. C3.ai was born again. By Feb 6, its stock had tripled to US$30.92 on high volume.

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That’s what happens when we are amid a market bubble. Investors just race to buy anything connected with AI. And what better stock than the one whose ticker symbol is AI? C3.ai sock plunged 30% last week. It has rebounded to around US$23 with a market cap of around US$2.5 billion, but it is still a slow-growing software firm that helps industrial firms use AI. It’s unclear how the boom of generative AI would help grow its revenues and put it on a path to profitability.

Another AI pure play is BigBear ai Holdings, a 20-year-old firm that develops operational AI software for cyber engineering and business agility. It has a market cap of just US$480 million but has notched several government contracts for artificial intelligence in recent years. BigBear stock soared 740% from early January to Feb 6. It fell 44% though it is still up 375% over the past eight weeks.

SoundHound AI (market cap US$800 million) is a third purely AI stock, whose stock soared 260% in the first five weeks of this year. SoundHound, which facilitates customer service phone calls and conversational AI that replaces human interaction, has seen its stock pared back but is still up 210% since the start of this year.

In 1999 and 2000, as the tech correspondent for a Hong Kong-based regional news magazine, I had a front-row seat watching the bubble of tech and dotcom stocks. It was a crazy time to be a journalist. Long before the bubble burst in March 2000, my colleagues and I were betting on how soon and badly it would all end.

The hard truth

The market’s recent fascination with remotely linked artificial intelligence has become a bubble. Having lived through plenty of bubbles — real estate, biotech, crypto and the dotcom bubble — I can tell you that one thing all bubbles have in common is that they eventually pop. The other thing they have in common is they tend to last slightly longer than we all think they might. Unfortunately, that’s when many rational people lose their minds.

When you find yourself amid a transformation we are about to witness in AI, the best course is to stay away from hyped-up beneficiaries whose prices have soared skywards. During the gold rush, the people who made more money were not those digging for gold or those who owned the land being dug but by makers of picks and shovels used to do all the digging.

So, how should investors play the latest ChatGPT and AI boom? For AI, those picks and shovels can be software or hardware stocks, or for that matter, a combination of hardware and software bundled within a sophisticated chip. Nvidia Corp is the world’s leading producer of high-performance graphic processing chips and GPUs, the key to AI, cloud computing, virtual reality, automation and blockchain — all leading tech sectors. Nvidia has a market capitalisation of over US$550 billion, more than five times that of Intel, which, until four years ago, was the most valuable chip maker on earth.

Another player is Advanced Micro Devices (AMD), which competes head-to-head with Nvidia for chips used in gaming and data centres for cloud computing and is trying to carve a niche for itself in AI-centric chips well. I wrote about Nvidia in this column (Can Nvidia remain a chip powerhouse?) in February 2018, when its stock was split-adjusted US$58. Despite a roller coaster ride, Nvidia stock has since almost quadrupled. Nvidia stock reached an all-time high of US$333.41 at the end of November 2021 but started to slip as crypto prices plunged. Nvidia chips are used in mining Bitcoins and other cryptocurrency.

Bank of America’s chip analyst Vivek Arya notes that Nvidia has what it takes to lead the generative AI “arms race.” For one thing, he says, Nvidia has a “full stack of accelerated silicon, systems, software and developers.” Arya believes Nvidia’s sales and earnings could see compound annual growth rates of 25% to 34% over the next five years “as generative AI adoption increases,” which in turn will help dramatically grow the total addressable market of the big chip makers accelerator business to US$62 billion by 2027.”

So how big is the market? Deploying ChatGPT to run Google search would require over 3 million graphic processing units and cost US$80 billion or as much as what Amazon, Google and Microsoft — the three big cloud infrastructure providers — spent on data centres in 2021, says Pierre Ferragu, an analyst at New Street Research. If a chip maker like Nvidia gets 5% of the entire hardware infrastructure spent to rebuild Google, that would be US$4 billion in additional revenue. Add in Microsoft and others’ spending on generative AI; it makes a substantive difference to the bottom line.

Over the next six to 12 months, companies will be trying to rebrand themselves as AI or AI-centric firms. Tens of billions of VC money will be poured into AI start-ups. That’s what the market wants, and that is what VCs and investment banks will give investors. Here is my two cents worth of prediction: Only a handful of those companies will thrive and enter the big tech league. The rest will just fade away as soon as the AI mania subsides. And even those that make it will have plenty of scary moments. Remember, the dotcom bubble.

Take Amazon.com, which made it through during the 2000 dotcom bubble. Just an online bookseller at the time, Amazon’s stock peaked at US$113, or a split-adjusted US$5.65, in March 2000 before collapsing 96% over the next year or so. The stock has risen nearly 20- fold since it was still down 49% from its alltime high in July 2021. Whatever you do, just tread carefully in this AI bubble.

Assif Shameen is a technology and business writer based in North America

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