Why In 2024 AI Has To Show It Can Make A Profit

With AI, Big Tech is once again at peak hype while staring into the trough of disillusionment. The issue is that potential corporate customers are still trying to figure out how best to use it, delaying revenue growth for providers. Concentrated domination which limits options and the threat of lawsuits like the recent New York Times legal action against Microsoft and OpenAI is also making corporations wary. 

In short, AI may still become the next big thing, but it may take longer than expected. JL

Dan Gallagher reports in the Wall Street Journal: 

One thing about 2024: AI is going to need to start showing the money. Whether it can is a whole other question. Last year’s big, speculative run added risk to the tech sector. Few companies aside from Nvidia are earning serious money on AI. Last year also saw many tech companies undergo layoffs and other restructuring as business slowed. AI will need to produce a lot of new growth to move the needle. And many corporate customers are still figuring out how they want to use the technology, which could mean limited investment activity in the near term. “We are at peak AI hype with a likely slide into the trough of disillusionment, as  GenAI revenue take longer to materialize yielding low single digit upside to CY24 revenue estimates.”

One thing already seems certain about 2024: AI is going to need to start showing the money. Whether it can is a whole other question.

Excitement for generative artificial intelligence sparked by OpenAI’s chatbot was the dominant theme for investors in 2023. The Nasdaq Composite jumped 43% for the year—its second-best annual performance in 15 years. Meanwhile, technology and e-commerce companies on the S&P 500 averaged a gain of 57%, more than double the broad index’s overall performance for the year. Indexes tracking subsectors such as chips and software recorded their best annual gains since 2009, when the market was bouncing back from the global financial crisis.  

But the new year might already be ushering in more-sober perspectives. Tech stocks fell sharply on Tuesday, with some of the biggest gainers of 2023 registering the steepest drops. That includes chip makers such as 

Nvidia NVDA -1.28%decrease; red down pointing triangle

, 

Intel INTC -1.54%decrease; red down pointing triangle

 and 

Advanced Micro Devices AMD -2.37%decrease; red down pointing triangle

 along with software competitors such as 

Salesforce CRM -1.41%decrease; red down pointing triangle

, 

Adobe ADBE -1.24%decrease; red down pointing triangle

 and 

ServiceNow NOW -1.69%decrease; red down pointing triangle

. The megacap tech companies known as the Magnificent Seven averaged a loss of nearly 2% for the day, equating to a loss of more than $238 billion in combined market value.

 

The technology behind generative AI like ChatGPT has exploded, fueling a demand for chips that can handle the processing power these programs need. WSJ visited Amazon’s chip lab to see how these chips work, and why tech titans think they are the future. Illustration: John McColgan

Hangover from AI hype wasn’t the sole culprit. 

Apple AAPL -0.65%decrease; red down pointing triangle

 shares fell more than 3% on Tuesday after Tim Long of 

Barclays

 cut his rating on the stock to “sell,” citing mostly lackluster demand for the latest iPhones. 

But it is last year’s big, speculative run that added risk to the broader tech sector. Few companies aside from Nvidia are yet earning serious money on AI. Last year also saw many tech companies undergo significant layoffs and other restructuring moves as business slowed. Growth rates at the respective cloud-computing businesses of 

Amazon AMZN -0.63%decrease; red down pointing triangle

, 

Microsoft MSFT 0.13%increase; green up pointing triangle

 and Google all decelerated notably in 2023 compared with prior years, as major corporate customers undertook optimization efforts to trim their bills.

 

Still, stock prices at Amazon, Microsoft and Google parent 

Alphabet

 all surged during the year. Microsoft shares jumped 57%—their best annual performance since 1999—to a record. The stock also ended the year at more than 33 times forward earnings, which is 18% above its five-year average, according to FactSet. Microsoft’s close relationship with OpenAI and its aggressive adoption of ChatGPT-like functions into its products ranging from Word to PowerPoint to the Bing search engine, have given the storied software company the perceived early lead in the AI race. 

But Microsoft already has a massive business throwing off more than $218 billion in annual revenue, against which AI will need to produce a lot of new growth to move the needle. And many of the company’s large corporate customers are still figuring out how they want to use the technology, which could mean limited investment activity in the near term. In a survey of chief information officers last month, Brent Thill of 

Jefferies

 noted that AI and machine learning “are not major drivers behind why customers intend to increase cloud spend.” Bernstein analyst Toni Sacconaghi noted in a Dec. 19 report that “CIOs are generally still in the exploration phase on AI” after his own survey.

 

Adobe has already shown what AI letdown can look like. The software maker’s stock price rose more than 85% for the year ahead of the company’s fiscal fourth-quarter report last month, as investors had high hopes that Adobe’s new GenAI tools such as Firefly would spark a surge in demand. But Adobe ended up using the report to project only 10% revenue growth for the new fiscal year—flat compared with the previous year’s performance and a number that most analysts viewed as Adobe being conservative. The stock has still fallen more than 7% since.   

A similar turn in sentiment could haunt many of tech’s fourth-quarter reports starting later this month. “We worry AI benefits may materialize later than many expect,” wrote Scotia Capital software analyst Patrick Colville in a note to clients before the holiday break. In his own report around the same time, Alex Zukin of Wolfe Research wrote that “we are at peak AI hype with a likely slide into the trough of disillusionment, as actual GenAI revenue dollars take longer to materialize yielding at most low single digit upside to CY24 revenue estimates.” 

It might take a while for tech’s expensive chatbots to prove they aren’t just talk.