AI Revolution Over? Experts Weigh In!

Artificial intelligence has dominated conversations on Wall Street during this tech earnings season, raising a pivotal question: when will AI investments start generating substantial profits? Over the past 18 months, AI has evolved into a buzzword with tech giants positioning it as a transformative force capable of revolutionizing every industry. Companies have invested billions in data centers and semiconductors to support large AI models. Despite these efforts, the AI-driven products launched so far seem underwhelming—chatbots lacking a clear revenue path, cost-cutting tools like AI-assisted coding and customer service, and AI-enhanced search functionalities that sometimes falter.

Investors’ Impatience with AI

Despite the massive expenditures, the financial outcomes from AI investments remain modest, leaving investors anxious. Amazon’s recent earnings report and outlook, released Thursday, highlighted concerns over its hefty AI spending amid challenges faced by its core business. This apprehension contributed to Amazon’s stock plummeting nearly 9% on Friday. Similarly, Intel experienced a 25% drop in stock value after announcing a $10 billion cost-cutting initiative, including workforce reductions, to manage its AI-related expenses.

The pressing question among investors is whether these investments in AI are truly worthwhile or if they are merely a fleeting industry trend. Morgan Stanley analyst Keith Weiss articulated this concern during Microsoft’s earnings call, saying, “Right now, there’s an industry debate raging around the (capital expenditure) requirements around generative AI and whether the monetization is actually going to match with that.”

Tech Giants Defend Their AI Strategies

Analysts have been probing tech leaders for clarity on the revenue potential of AI. UBS analyst Steven Ju questioned Google CEO Sundar Pichai about the timeline for AI to “help revenue generation … (and) create greater value over time, versus just cutting costs?” A recent Goldman Sachs report further probed if the industry was experiencing “too much spend, too little benefit” regarding AI investments.

The post-earnings dip in Google and Microsoft’s share prices reflects investors’ disappointment in the lack of significant AI-driven revenue growth. However, Meta managed to evade this frustration by demonstrating how its AI investments bolster its core business, including enhancing ad creation with AI tools.

D.A. Davidson analyst Gil Luria shared with CNN that some investors hoped tech giants would signal a slowdown in AI infrastructure spending, given AI’s limited returns thus far. However, companies like Google, Microsoft, and Meta are doubling down on their AI investments, indicating their commitment to an AI-driven future. Meta, for instance, raised its capital expenditure forecast for the year to between $37 and $40 billion. Meanwhile, Microsoft plans to exceed its $56 billion capital expenditure from 2024 in fiscal 2025, and Google projects spending “at or above” $12 billion quarterly throughout the year.

Patience Wears Thin

Tech leaders argue that AI’s full potential requires more time to materialize. Microsoft CFO Amy Hood emphasized on the earnings call that AI technology’s monetization would unfold “over the next 15 years and beyond.” Meta’s CFO Susan Li echoed this sentiment, acknowledging that “Gen AI is where we’re much earlier … We don’t expect our gen AI products to be a meaningful driver of revenue in ’24. But we do expect that they’re going to open up new revenue opportunities over time that will enable us to generate a solid return off of our investment.”

This extended timeline challenges investors accustomed to consistent quarterly growth from Silicon Valley. Luria stated, “If you’re going to invest now and get returns in 10 to 15 years, that’s a venture investment, that’s not a public company investment. For public companies, we expect to get return on investment in much shorter time frames. So that’s causing discomfort, because we’re not seeing the types of applications and revenue from applications that we would need to justify anywhere near these investments right now.”

The Uncertain Future of AI Returns

Skepticism about AI’s future profitability persists. Goldman Sachs analyst Jim Covello noted in a recent report that “the technology isn’t designed to solve the complex problems that would justify the costs.” Tesla’s experience with AI-based “full self-driving” technology exemplifies the lengthy path AI products must traverse before achieving widespread functionality. Despite being integral to Tesla’s business strategy since 2015, FSD still necessitates human oversight due to persistent safety concerns.

Tech executives maintain that underinvesting in AI poses a more significant risk than overspending. Google’s Pichai emphasized during an earnings call that “the risk of underinvesting is dramatically greater than the risk of overinvesting.” Meta CEO Mark Zuckerberg reiterated this sentiment during his company’s call. As companies remain committed to AI, they recognize the importance of having ample computing capacity to maintain a competitive edge in the AI race. However, with sufficient revenue from core businesses to support their investments, they can afford to weather the current period of uncertain returns.

Nevertheless, the pressure from investors to temper AI infrastructure investments and prioritize revenue growth is expected to intensify. Luria predicts that by late this year or early next year, tech leaders may reconsider their spending strategies, potentially scaling back investments as a result of mounting investor demands.

“Right now, the game is, ‘we all have to signal that we’re willing to invest as much as we need because we want to keep this leadership position,’ but at some point the investment is going to be so onerous that one of them … will say, ‘maybe next quarter, we won’t invest so much,’ and then you’ll see that happening for the rest of them,” Luria remarked. “Big picture, this level of investment is not sustainable.”