THE financial markets I am in the grip of investor enthusiasm for artificial intelligence and this frenzy shows no signs of abating. By virtue of its potential to give wings to productivity in all sectors of the economy, Generative AI It is clearly an essential concept for all of us and must be understood not only from the point of view of its influence on our lives, but also from that of investments. In this regard, “There are four risks to consider.” as he explains Chris Buchbinder, Equity Portfolio Manager Capital Group.
Investors often overestimate the short-term impact of technology
We tend to overestimate the short-term impact of technological innovation, but underestimate its long-term impact. This – continues Buchbinder – can be explained by the productivity J-curve. When technology is introduced, companies and investors are enthusiastic about its transformative potential and invest heavily in building the infrastructure.
However, adapting to new tools to increase productivity takes time. New technologies can act as a hindrance to productivity as businesses and individuals continue to use old processes while learning and integrating new ones. As a result, it can take several years before tangible economic benefits materialize.
We believe that “in 10 years AI will have transformed the way we do business. But that doesn’t mean that returns will be immediately apparent or that AI is an escalator that only moves upward for businesses. The whole process is also a cycle and will be subject to the same laws of psychology and economics that we have seen in other innovation cycles.”
Pace of capital investment will depend on results
The tech giants have invested tens of billions of dollars in AI infrastructure. Much of this spending went to semiconductors and other materials needed to build data centers. For
to continue to spend at such high levels, we expect these so-called hyperscalers (companies that represent the major providers of Internet and cloud platforms) to need to see a return
tangible return of your investment in the form of revenues and, finally, earnings growth.
Will we see a return from AI? next year or a couple of years from now? We believe that for some companies it will happen, but for many others we will not see this return. The road will likely be bumpy for companies whose stock prices already reflect future AI-related growth expectations.
We are facing a film already seen. The market and companies get excited about a growth opportunity and invest significantly in that opportunity. In this case, that means spending heavily on AI infrastructure. When the market changes its mind and decides that spending is a negative, companies end up aligning with that thesis and start cutting spending. That’s not the logic you see in AI investments right now, but when the market changes its mind, you’ll eventually see that logic play out in the industry and spending will decline.
Today we believe that the spirit of efficiency is still present in big tech companies. We expect these companies to be more disciplined in their investment and earnings guidance than they have been in the past and will eventually show discipline in AI spending. If so, this could lead to flat CapEx but also earnings and margin surprises in the coming years.
Resource constraints could slow AI implementation
The construction of an AI infrastructure requires a lot of resources, not least human talent. This includes not only the people who can create the basic models that generative AI depends on, but also those who know how to implement them in enterprises. AI also requires a lot of electricity to run its data centers. As a result, energy demand is increasing, which puts pressure on the grid. Hyperscalers have become nuclear power providers to help meet their enormous energy needs.
Potential capacity constraints suggest thatand AI data centers may not be able to grow at the same rate that some expect in the coming years.
Blisters can be very painful
To be fair, the enthusiasm for the titles related toAI is different from the 90s bubble.
First, some tech giants have seen strong earnings growth in recent quarters and are more valuation-supported than the leading stocks in 2000. However, we expect that at some point in the next 12-24 months, a disenchantment zone will be reached, where growth stops. Despite what has been a strong persistent trend, some of the leading AI stocks could see a marked pullback.
Although AI should meet the most optimistic expectations of their potential, there remains the risk that investors could lose a fair amount of money along the way. When the tech and telecom bubble burst in 2000, many companies went out of business, while others suffered sharp declines in market value. It took years for them to recover.
In conclusion, the expert underlines, “Today we are going through a period of growing enthusiasm for AI. We think AI is going to be amazing and very important. However, we believe that at this point in the cycle investors should be selective and carefully consider the risks.”
