The sustainability of Wall Street’s investment surge, driven by artificial intelligence (AI), is brought into question as the tangible impact of generative AI on businesses remains uncertain. This query looms large in the technology industry, particularly with upcoming quarterly results from major corporations.
The game-changing claims for the technology supporting ChatGPT have prompted enormous investments for the infrastructure to create text, image, or video. However, there may be little immediate proof in the financials that the key consumers of this technology – businesses utilising AI in their operations or individuals employing it in everyday life – are poised to make significant payments.
Microsoft, due to report profits next Thursday, has become somewhat indicative of the industry’s trajectory for better or worse. Through its strong partnership with OpenAI and initial efforts to incorporate the technology into all its software, it has forged a notable lead.
Microsoft cited three months ago that the increased demands from AI contributed six percentage points of growth to its Azure cloud platform, where customers began trialling the technology. This increase probably equates to an additional $3 billion (£2.8 billion) annually. Recently, it was disclosed that Azure sales reached $34 billion in 2022 when it was still a smaller enterprise.
Despite impressive figures, this constitutes just over 1% of total revenue Microsoft is forecasted to declare this year.
Microsoft’s other foray into generative AI – the Copilot feature – serves as a knowledgeable assistant for its software users, and revenue impact predictions for it are still in infancy. If Microsoft is hesitant to estimate a return on major AI investments, other corporations are lagging even further behind.
Tech executives may be unduly optimistic in the ensuing days, boasting about successful trials and optimistic indicators as customers grapple with generative AI. The real rate of adoption, however, remains unpredictable.
The distinctive challenge generative AI presents is its notorious weaknesses. The propensity to return faulty outcomes, or “hallucinations,” creates a novel issue. The fitting of this technology into current business procedures and people’s willingness to adapt to it remains to be seen.
Despite the uncertainty surrounding the acceptance of generative AI, hefty investments are being made in the necessary technological infrastructure. Nvidia, a notable player in this field, has seen its data-centre chip sales skyrocket to $47 billion last year, with an expected jump to approximately $100 billion this year. Tech firms urge patience in anticipation of the impact of generative AI and its subsequent sales, which should be noticeable later this year or by 2025. However, delays could cause significant repercussions for the hardware industry, following the surge in capital expenditure powered by the AI boom.
As discussions about the potential gains from AI prevail during tech earnings calls in the days to come, large tech companies should provide sufficient reassurances with positive news from their current businesses to keep investors content.
Just a year ago, there were fears of an economic downturn in the US which, coupled with the post-pandemic decrease in demand for digital services, clouded the tech sector. Nevertheless, it is predicted that the combined revenue of the five biggest tech platforms (Alphabet, Amazon, Apple, Meta, and Microsoft) increased by 9% in the first quarter of this year. This figure, a slight drop from the preceding quarter’s 12%, is still impressive given these companies’ combined expected quarterly revenue exceeding $400 billion.
The major tech companies’ post-tax profits seem to be on a promising trajectory. Projections show a 27% increase to almost $85 billion, pointing towards a meeting of favourable conditions.
Last week, Amazon’s shares hit a record high, stirring optimism about a period of increased profitability due to improved retail margins and expected growth acceleration of Amazon Web Services. Meta too is enjoying an earnings boom after reducing spending on the metaverse, much to Wall Street’s relief. Margins at Google and Microsoft are steadily climbing, largely owing to improved cost management.
Only Apple seems to have encountered a hiccup, due to a mature smartphone market and questions surrounding iPhone sales in China.
This promising snapshot should set the tone for upcoming earnings reports. But the questions revolving around AI only seem to intensify. – Copyright The Financial Times Limited 2024.
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