Leaving the gloom of UK politics aside for a week, I want to muse on one of the key themes driving investor returns at present, which is that large numbers of companies continue to pour billions of dollars into artificial intelligence, and the ensuing optimism around any windfall that this may generate in the long run.
Microsoft, Google, Amazon and Meta to name just a few, have collectively pledged tens of billions of dollars towards AI infrastructure, talent acquisition, and proprietary models but so far, the return on this investment seems murky at best.
AI, while transformative in theory, is proving expensive, uncertain, and slow to monetise. High development costs, massive energy requirements, and fierce competition is squeezing margins. Building and training large language models can cost hundreds of millions per iteration, with no guaranteed commercial payoff.
With even OpenAI chief Sam Altman suggesting that investors are getting ‘overexcited’, some investors are questioning whether the promised gold rush will ever deliver the expected returns. For shareholders, the risk is that these tech behemoths are chasing growth in a market that isn’t yet mature enough to support it. Many AI products remain in experimental phases, while regulatory scrutiny is increasing, particularly around data privacy and ethical concerns.
Worse still, the AI arms race is pushing companies to outspend one another just to stay relevant, not necessarily to generate profit. While executives tout long-term benefits, the short-term cost is ballooning R&D budgets and thinning earnings. Is this an echo of the dot-com bubble, where hype outpaced value creation?
Wall Street legend James Grant is quoted as saying that ‘a bubble is a bull market in which the user of the derogatory term has failed to participate’. Investors will need to make up their own minds on this in due course.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
