“Despite its high price tag, the technology is nowhere near where it needs to be to be useful,” Jim Covello, Goldman Sachs’ most senior equity analyst and a 30-year veteran of covering technology companies, said in a recent article. report on AI. “Overbuilding things the world doesn’t need or isn’t ready to adapt to usually ends badly.”
Covello’s comments contrast sharply with a different report from Goldman Sachs Just over a year ago, some of the bank’s economists said AI could automate 300 million jobs worldwide and increase global economic output by 7% over the next decade, sparking a wave of media coverage about AI’s disruptive potential.
Wall Street analysts expect big tech companies to spend about $60 billion a year developing AI models by 2026, but to reap only about $20 billion a year in AI revenue by that time, according to Barclays. That kind of investment would be enough to power 12,000 products similar in size to OpenAI’s ChatGPT, Barclays analysts wrote in a recent report.
OpenAI launched ChatGPT in November 2022, setting off a race in Silicon Valley to create new AI products and get people to use them. Big tech companies are spend tens of billions of dollars on technology. Retail investors have bid up the prices of these companies and their suppliers, especially Nvidiawhich makes the computer chips used to train AI models. Shares of Google’s parent company Alphabet are up 25% this year, Microsoft is up 15% and Nvidia is up 140%.
Venture capitalists have also poured billions of dollars more into thousands of AI startups. The rise of AI contributed to the $55.6 billion that venture capitalists poured into U.S. startups in the second quarter of 2024, the most in a single quarter in two years, according to venture data firm PitchBook.
Tech executives say artificial intelligence will revolutionize large parts of modern life in the same way the Internet or cell phones did. Indeed, AI has made significant strides and is already being used to translate documents, write emails and help programmers code. But some companies that were predicting the boom last year are worried about whether the tech industry will be able to recoup the billions of dollars invested in AI in the near future — or ever.
“We expect many new services…but probably not 12,000,” Barclays analysts wrote. “We sense that Wall Street is becoming increasingly skeptical.”
In April, Meta, Google and Nvidia all have signaled their commitment to Going all-in on AI Telling investors on quarterly earnings calls that they would increase the amount they spend on building data centers to train and run AI algorithms, Google reiterated Tuesday that it would spend more than $12 billion per quarter on AI development. Microsoft and Meta are due to report their own results next week and could provide more guidance on their AI roadmaps.
Pichai said Tuesday that it would take time for AI products to mature and become more useful. He acknowledged the high cost of AI but said that even if the AI boom slows, the data centers and computer chips the company buys could be used for other purposes.
“The risk of underinvesting is significantly greater for us than the risk of overinvesting,” Pichai said. “There are much greater downsides to not investing to be in the lead here.”
A Microsoft spokesperson declined to comment on the report. A Meta spokesperson did not respond to a request for comment.
Unrealistic expectations
Vinod Khosla, co-founder of computer networking systems company Sun Microsystems and one of Silicon Valley’s most influential venture capitalists, has compared AI to personal computers, the internet and cell phones in terms of its impact on society.
“These are all fundamentally new platforms. In each of them, each new platform causes a massive explosion of applications,” Khosla said. The rush to AI could cause a financial bubble where investors lose money, but that doesn’t mean the underlying technology won’t continue to grow and become more important, he said.
“There was an Internet bubble, according to Goldman Sachs, because prices went up and down. In my opinion, Internet traffic did not go down at all.”
AI is changing the way people work, do business and interact with each other, and many startups will go bankrupt, he said. But overall, the industry will make money from AI. He predicts that eventually, trillion-dollar companies will be created in the AI field, such as humanoid robots, AI assistants and programs that can completely replicate the work of highly paid software engineers.
But so far, AI is not contributing to an increase capital risk Investors who invested in venture capital firms, which represent initial public offerings or acquisitions of tech startups, saw their investments return on their investments. Venture capital exits, which represent initial public offerings or acquisitions of tech startups, fell to $23.6 billion in the second quarter, down slightly from $25.4 billion the previous quarter, according to PitchBook.
The tech industry would need to generate about $600 billion in revenue annually to offset all the money being invested in AI right now, but it’s nowhere near that number, David Cahn, a partner at venture capital firm Sequoia Capital, wrote in a paper. blog post last month.
“Speculative frenzies are a natural part of technology, and we shouldn’t be afraid of them,” Cahn said. “But we have to be careful not to buy into the illusion that has spread from Silicon Valley to the rest of the country, and indeed to the world. That illusion tells us that we’re all going to get rich quick.”
MicrosoftRevenues at Google and Microsoft are surging, particularly in their cloud businesses, where they sell access to AI algorithms and the storage space to use them. Executives at those companies say AI is driving new interest in their products and will become a major source of revenue in the future. But some analysts point out that there are very few standalone products that are big hits, with the exception of OpenAI’s ChatGPT and Microsoft’s GitHub Copilot coding assistant.
“Wall Street is becoming increasingly skeptical given that ChatGPT and GitHub Copilot have been the two standout successes in the consumer and enterprise space over the past 20 months,” Barclays analysts wrote in their report.
The cost of developing and operating AI programs will come down as other companies compete with Nvidia, according to Vineet Jain, CEO of Egnyte, a data management and artificial intelligence company. Right now, the cost of delivering AI products is too high, and he doesn’t expect to generate any AI-specific revenue this year. But as costs come down and demand continues to grow, that will change, Jain said.
“The value proposition is absolutely there, but current expectations are still unrealistic,” he said, referring to the frenzy of selling AI products to consumers and businesses.
Some startups have already had a lull in the early days of AI’s rise. Inflection AI, a startup founded by veterans of Google’s famed DeepMind AI lab, raised $1.3 billion last year to expand its chatbot business. But in March, the company’s founders left to work for Microsoft, taking some of their top employees with them to the tech giant. Other AI companies, like Stability AI, which pioneered a popular AI image generator, have had to lay off workers. The industry is also facing lawsuits and regulatory challenges.
Large companies like Google and Microsoft will be able to continue spending money until demand for AI products increases, but smaller startups that have absorbed a lot of venture capital may not survive the transition, Jain said.
“It’s like a soufflé that keeps rising and rising, it needs to come down a little.”
