Tag: Inc. (META)

Understanding Meta's 0.4% Yield and Its Growth Potential

Posted on by The INO.com Team

Dividend-loving investors worldwide woke up with exciting news on Friday, as Facebook parent Meta Platforms, Inc. (META) announced its first-ever quarterly dividend and authorized a $50 billion share buyback program.

The company will pay a cash dividend of 50 cents per share on March 26 to shareholders of record as of February 22, joining other peers, including Apple Inc. (AAPL), Microsoft Corporation (MSFT), and Oracle Corporation (ORCL), which have regular payouts. META’s board intends to issue a cash dividend on a quarterly basis.

“Introducing a dividend just gives us a more balanced capital return program and some added flexibility in how we return capital in the future,” Meta’s Chief Financial Officer Susan Li told analysts on its earnings call.

META’s annual dividend of $2 translates to a yield of 0.4% at the prevailing share price. The stock finished nearly 20% higher to $474.99 on Friday after reporting better-than-expected fourth-quarter and full-year 2023 earnings.

The average yield for a dividend-paying stock in the S&P 500 is nearly 2%. Meta’s dividend payout is lower than that rate; however, companies generally start small. Now, investors can look forward to its dividend growth and stock gains.

Looking at Microsoft, the company initiated its cash dividend on January 16, 2003. Its annual dividend was $0.08 per share, which resulted in a yield of about 0.3%. A year following the dividend declaration, MSFT’s stock was up 10%, and the annual dividend for 2024 was raised to $0.16. Currently, the company pays a quarterly dividend of $0.75.

Talking about Apple, it stopped paying cash dividends in 1995 but then declared again in January 2013. Adjusting for all the splits, cash dividends in 2013 translated to an annualized yield of nearly 1.4%. A year after the dividend restart, AAPL’s stock was approximately 24% up as the company continued payouts. Since the restart, Apple has paid a total of around $34 per share.

Dividends are typically welcomed by shareholders and signal management’s confidence about the company’s future growth. Moreover, initial dividend payouts open up to investors who only hold stock in dividend payers.

Further, Meta’s recently released report marked the fourth quarter of the company’s self-described “year of efficiency,” which founder and CEO Mark Zuckerberg announced in February 2023. The company’s turnaround strategy involved layoffs and other cuts to spending, which in turn ended up being a successful effort to reverse the previous year’s revenue declines and share price weakness.

Outstanding Last Reported Financials

For the fourth quarter that ended December 31, 2023, META reported revenue of $39.17 billion, an increase of 24.7% year-over-year. The revenue surpassed analysts’ estimate of $40.11 billion. The company’s revenue from the Advertising segment grew 23.8% year-over-year, and its revenue from the Family of Apps segment rose 24.2%.

Meanwhile, META’s total costs and expenses reduced by 7.9% year-over-year to $23.73 billion. Its operating margin more than doubled to 41%, a clear sign that several cost-cutting measures are boosting profitability.

Facebook parent Meta’s income from operations rose 156% from the prior year’s period to $16.38 billion. Its net income increased 201.3% from the year-ago value to $14.02 billion. The company posted earnings per share attributable to Class A and Class B common stockholders of $5.33, compared to the consensus estimate of $1.76, and up 202.8% year-over-year.

As of December 31, 2023, META’s cash and cash equivalents stood at $41.86 billion, compared to $14.68 billion as of December 31, 2022. The company’s total assets were $229.62 billion versus $185.73 billion as of December 31, 2022.

Family daily active people (DAP) came in at 3.19 billion on average for December 2023, up 8% year-over-year. Family monthly activity people (MAP) was 3.98 billion as of December 31, 2023, an increase of 6% year-over-year.

Also, Facebook daily active users (DAUs) and Facebook monthly active users (MAUs) were 2.11 billion on average and 3.07 billion as of December 31, 2023, up 6% and 3% year-over-year, respectively.

As of December 31, 2023, the tech giant completed the data center initiatives and the employee layoffs, along with the facilities consolidation initiatives. META’s headcount was 67,317 at the end of the year 2023, a decline of 22% year-over-year.

“We had a good quarter as our community and business continue to grow,” said CEO Zuckerberg. “We’ve made a lot of progress on our vision for advancing AI and the metaverse.”

Fiscal 2024 Outlook

For the first quarter of 2024, META expects total revenue to be in the range of $34.50-37 billion. For the full year 2024, the management expects total expenses to be in the range of $94-99 billion, unchanged from the previous outlook.

The company anticipates full-year capital expenditures to be in the range of $30-37 billion, an increase of $2 billion in the high end of its prior range. Meta expects growth to be driven by investments in servers, including AI and non-AI hardware and data centers, and it plans to ramp up construction on sites with its previously announced new data center architecture.

META’s updated outlook reflects its evolving understanding of its AI capacity demands as the company anticipates what will be needed for the next generations of foundational research and product development.

Ramping up Efforts in AI and Metaverse

Meta is making consistent efforts to secure its place in the increasing AI arms race. Last month, CEO Mark Zuckerberg announced that META plans to build its own artificial general intelligence, known as AGI, which is artificial intelligence that meets or exceeds human intelligence in almost every area. He added that the company further plans to open it up to developers.

In a video posted to Meta’s social network Threads, Zuckerberg said building the best AI for chatbots, creators, and businesses requires enhanced advancement in AI across the board. “Our long term vision is to build general intelligence, open source it responsibly, and make it widely available so everyone can benefit,” he said in a post on Threads.

The tech giant announced building out its infrastructure to accommodate this push to get AI into products, and it planned to have about 350,000 H100 GPUs (graphics processing units) from chip designer NVIDIA Corporation (NVDA) by the end of this year. In combination with equivalent chips from other suppliers, Meta will have around 600,000 total GPUs by the end of the year, Zuckerberg said.

He added that the company plans to grow and bring its two major AI research groups – FAIR and GenAI – together to accelerate its work. He further said he believes that Meta’s vision for AI and the AR/VR-driven metaverse are connected.

“By the end of the decade, I think lots of people will talk to AIs frequently throughout the day using smart glasses like what we’re building with Ray Ban Meta.”

Mark Zuckerberg’s recent announcement is one of the company’s biggest pledges to double down on AI. Earlier last year, after the viral success of OpenAI’s ChatGPT, Zuckerberg announced that Meta is creating a new “top-level product group” to “turbocharge” the company’s work on AI tools.

Since then, Meta has introduced tools and information aimed at assisting users understand how AI influences what they see on its apps. The company has launched a commercial version of its Llama large language model (LLM), ad tools that can generate image backgrounds from text prompts, and a “Meta AI” chatbot that can be accessed directly via its Ray-Ban smart glasses.

In his posts last month, Meta CEO said the company is currently training a third version of the Liama model.

Impressive Historical Growth

Over the past three years, META’s revenue and EBITDA grew at CAGRs of 16.2% and 15%, respectively. The company’s net income and EPS rose at respective CAGRs of 10.3% and 13.8% over the same timeframe. Its levered free cash flow improved at 25.6% CAGR over the same period.

Moreover, the social networking company’s total assets increased at a CAGR of 13% over the same timeframe.

Favorable Analyst Estimates

Analysts expect META’s revenue for the first quarter (ending March 2024) to grow 25.3% year-over-year to $35.88 billion. The consensus EPS estimate of $4.25 for the ongoing quarter indicates a 93.3% year-over-year increase. Moreover, Meta has topped consensus revenue and EPS estimates in each of the trailing four quarters, which is remarkable.

Furthermore, Street expects Meta’s revenue and EPS for the fiscal year (ending December 2024) to grow 17.3% and 32.4% year-over-year to $158.20 billion and $19.69, respectively. For the fiscal year 2025, the company’s revenue and EPS are expected to increase 11.2% and 15.3% from the previous year to $175.98 billion and $22.70, respectively.

Solid Profitability

META’s trailing-12-month gross profit margin of 80.72% is 64.5% higher than the 49.07% industry average. Likewise, the stock’s trailing-12-month EBIT margin and net income margin of 36.33% and 28.98% are considerably higher than the industry averages of 8.47% and 3.50%, respectively.

In addition, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 28.04%, 17.84% and 17.03% favorably compared to the respective industry averages of 4.09%, 3.52%, and 1.43%. Also, its trailing-12-month levered FCF margin of 23.52% is 202.7% higher than the industry average of 7.77%.

Bottom Line

Facebook parent META recently reported a big beat on earnings and revenue for the fourth quarter of fiscal 2023. The company, which owns Facebook, Instagram, and WhatsApp, also announced its first-ever dividend of $0.50 per share and authorized a $50 billion share buyback program. Dividends generally signal management’s confidence about the company’s future growth.

Moreover, Meta’s market capitalization last month surpassed $1 trillion. The company last exceeded this mark in the market cap in 2021, when it was still known as Facebook.

Meta’s “year of efficiency” and several cost-cutting measures paid off in a significant way and offered a sweetener for investors, sending its shares higher. The stock is up nearly 38% over the past month and has gained more than 150% over the past year.

2023 was a pivotal year for the social networking giant, where it raised its operating discipline, delivered solid execution across its product priorities, and significantly improved ad performance for the businesses that rely on its services. In 2024, the company further seems well-positioned to build on its progress in each of these areas while advancing its ambitious efforts in AI and Reality Labs.

Given META’s robust financials, accelerating profitability, dividend initiation, and solid growth outlook, primarily as it seeks to strengthen its position in AI, it could be wise to invest in this stock now.

Shopify (SHOP) Unveils HOT AI Chatbot: Is it a 'Must' Buy?

Posted on by The INO.com Team

On July 12, Canada-based e-commerce company Shopify Inc. (SHOP) unveiled its artificial intelligence (AI) assistant designed to help merchants with questions, thereby becoming the latest in the string of companies to implement such a feature.

The assistant, Sidekick, would be embedded as a button on the platform that can complete tasks for merchants and answer specific questions about their business, including queries on sales and order trends within a store. Illustrating the features through a video on Twitter, SHOP CEO said that the AI feature is “coming soon.”

Since the announcement, SHOP’s stock has gained about 6.9%, compared to a 2.9% rise during the month prior, at par with the S&P 500. However, is the feature worth the hype? Let’s find out.

AI is an umbrella term that is used to denote a series of programs and algorithms designed to mimic human intelligence and perform cognitive tasks efficiently with little to no human intervention.
However, unlike other next-big things, AI has been around for quite some time, influencing how we shop, drive, date, entertain ourselves, manage our finances, take care of our health, and much more.

However, the technology came into the limelight late last year with the release of ChatGPT, which in its own description, is “an AI-powered chatbot developed by OpenAI, based on the GPT (Generative Pretrained Transformer) language model. It uses deep learning techniques to generate human-like responses to text inputs in a conversational manner.”

The easily accessible chatbot that took the world by storm is one of the several use cases of generative AI, the subset of algorithms that creates and returns content, such as human-like text, images, and videos, based on the user's written instructions (prompts).

Including this subset, AI in its various forms and applications can analyze large volumes of data generated during the entire course of our increasingly digital existence and identify trends and exceptions to help us develop better insights and make more effective decisions.

Given its massive importance, it’s hardly surprising that Zion Market Research forecasts the global AI industry to grow to $422.37 billion by 2028. Hence, this field has understandably garnered massive attention from investors who are reluctant to miss the bus on such a watershed development in the history of humankind.

The Catch

Notwithstanding all the transformative qualities of AI, investors in SHOP would be wise to be aware of the caveats before FOMO drives them to buy like there’s no tomorrow and inflate a "baby bubble" growing in plain sight.

Microsoft Corporation (MSFT) has bet big on the technology by announcing a multiyear, multibillion-dollar investment deal with Open AI. MSFT’s rival, Alphabet Inc. (GOOGL), is in hot pursuit. With ubiquitous AI-enabled technology across its platforms, the company has unveiled its response to ChatGPT, called BardAI.

Chinese tech giant Baidu, Inc. (BIDU) has also followed suit with Ernie Bot. Amazon.com, Inc. (AMZN) and Meta Platforms, Inc. (META) are also among the notable players in this dynamic domain. Alibaba Group Holding Limited (BABA), Zoom Video Communications, Inc. (ZM), and Databricks have all crowded this space with their own offerings.

Hence, while the technology is powerful (and useful, unlike most cryptocurrencies), the adoption is fast becoming so widespread that it remains unclear how it could help a specific business differentiate itself by developing enduring competitive advantages (read moats) and generating consistent profitability.

While AI is really good (and continually getting better) at predicting based on available data, it lacks contextual understanding. Since, in the words of Morgan Housel, 'things that have never happened before happen all the time,' it could be challenging for any AI tool to deal with tails, exceptions, and outliers in the shifting sands of business, economy, and society.

Even AAPL co-founder Steve Wozniak, who knows more than a thing or two about technology, agrees with the ‘A’ and not the ‘I’ of Artificial Intelligence.

Stick to Basics

Just as we have learned during the dot-com, cryptocurrency, real estate, and numerous other bubbles through the ages, markets can stay irrational longer than investors can stay solvent.

Therefore, even if the next big thing comes along and changes the world (and electricity, automobiles, personal computers, and the Internet really did), it is fundamentals that determine whether a business can survive to capitalize on those windfalls.

With inflation and rising interest rates expected to keep weighing on consumer spending, SHOP’s core activities in a softening market have been facing unrelenting pressure from competition on both livestream shopping and logistics fronts.

However, in a strategic U-turn, SHOP sold its logistics unit, which it had spent years building out, including last-mile delivery startup Deliverr, its largest acquisition ever, to supply chain technology company Flexport. Moreover, on May 4, SHOP announced that it would be laying off 20% of its workforce in addition to the 10% it let go last July.

Bottomline

Rather than getting too carried away and stretching an improvisation that keeps the business at par with the competition to frothy excesses with unrealistic expectations, it would be wise for investors to evaluate SHOP based on its fundamentals and prospects.

Apple (AAPL) vs. Meta Platforms (META): The VR Battle Begins!

Posted on by The INO.com Team

Technology and consumer electronics giant Apple Inc. (AAPL), which has a history of revolutionizing products like personal computers, smartphones, and tablets, has of late been in the thick of things.

AAPL announced its partnership with the game-development software maker Unity and unveiled a slew of other new products. Its year-ahead product roadmap includes the new Apple Watch Ultra along with the traditional fall launch lined up for the iPhone 15. The company is also expected to ship new M3-powered laptops and OLED-screen iPads by next year.

However, last month, AAPL, which boasts a sticky user base with a retention rate of over 90%, grabbed headlines by announcing its entry into the augmented reality/virtual reality (AR/VR) market with the Apple Vision Pro headset, which is set to hit the shelves early next year.

However, shortly before AAPL’s big release, incumbent technology heavyweight Meta Platforms, Inc. (META) also made its presence felt by unveiling its latest VR headset, the Quest 3, on June 1.
With the scheduled September 27 release of the successor to the Quest 2 headset, which was released in the fall of 2020, META expects to cement its position in the intensifying battle for a greater share of the steadily growing immersive technology pie.

With the battle lines in the AR/VR wars firmly drawn, we attempt to compare the weapons of both contenders to speculate which one is likely to come out on top.

Design

As with all of the other offerings in its product portfolio, AAPL has placed the user at the center of the design philosophy for the Vision Pro Headset. It has done away with the need for controllers, freeing users to navigate the AR/VR space with eyes, hands, and voice.

The headset is also made with two micro-OLED displays that let people around the users see their eyes on the outside while they are in the AR mode but not when they have switched to VR, thereby intelligently signaling availability.

The Quest headset comes with ergonomic controllers for interaction, with hands-free options. It has three cameras on the front that may improve visibility of the real world for users wearing the headset and interacting with applications. However, unlike the Vision Pro, the headset comes without a glass front.

AAPL’s Vision Pro is designed with two padded straps with cushioning on the back for added comfort. In contrast, META’s Quest 3 is 40% thinner than its predecessor and is fitted with three straps for weight distribution.

With the battery of the Vision Pro being external, corded, and compact enough to be placed and carried in pockets, it is apparently safer than Quest 3, which has its battery built into the headset.

Specifications

The Vision Pro comes with a micro-OLED display that delivers a 4K resolution for each eye with a refresh rate of 90 Hz. In comparison, the Quest 3 LCD comes with a resolution of 2,064 x 2,208 per eye and a refresh rate of 120Hz.

Regarding the chips powering the headset, Vision Pro comes with the Apple M2 processor, which can also be found in MacBook Air, MacBook Pro, and iPad Pro devices. However, the brand-new and purpose-built R1 chip would be used to process camera information. The Qualcomm Snapdragon XR2 Gen 2 chip will power the Quest 3.

The Vision Pro will have up to 16 GB RAM with 64 GB storage, while the Quest 3 offers 12 GB RAM with 128 GB storage. Both headsets claim to last up to two hours on a full charge. However, the former can be used without the battery while plugged into a socket.

Software & Support

The Vision Pro comes with a new operating system known as Vision OS that also lets users interact with familiar iOS and macOS apps in a mixed-reality environment. In comparison, the Quest 3 runs on Android open-source software.

While both headsets enable users to watch movies, browse the internet, and work using a virtual keyboard like one would using a physical computer, the Quest 3 is optimized for a fully immersive virtual reality gaming experience with haptic feedback technology that gives users a sense of touch.
Moreover, while the application software ecosystem is expected to be gradually populated as more game developers jump on board, Quest 3 offers more games from its VR store.

Cost

Compared to the Quest 2, which had a starting price of $299 during its release in the fall of 2020 and was later raised to $399 in July 2022, the Quest 3 would be available for $499.

However, the Vision Pro is in a league of its own as it would sell for an eye-watering $3,499 when it is released early next year.

In addition, AAPL has been forced to make significant cuts in its forecasted production for the Vision Pro due to design complexities resulting in apparent production difficulties for the Chinese contract manufacturer Luxshare.

These delays could also negatively impact AAPL’s plans to begin work on two new and bifurcated product lines, one second-generation high-end model that will continue the original Vision Pro and the other a lower-end version.

Bottomline

While AAPL’s Vision Pro triumphs concerning design and features, META scores higher in pricing, availability, and suitability for gaming applications.
Hence, as with its other offerings, AAPL has the better product for those who feel that the quality is worth the wait and the hefty price tag.

Chips and AI Advanced Micro Devices Inc. (AMD)'s Next-Level Breakthroughs!

Posted on by The INO.com Team

Last month, we gauged the prospects of two semiconductor giants, NVIDIA Corporation (NVDA) and Intel Corporation (INTC), which have carved out their niches and cornered a significant share of the GPU and CPU domains, respectively. In this article, we have talked about another chip company and its agile efforts to grab the best of both worlds while creating a widespread following of its own.

Founded in 1968 by a group of 8 men led by the larger-than-life Jerry Sanders, Advanced Micro Devices, Inc. (AMD) released its first product in 1970 and went public in 1972. Despite starting life as a supplier for INTC, AMD parted ways with its client in the mid-80s, and by the late 80s, it reverse-engineered INTC’s products to make its own chips that were compatible with INTC’s software.

AMD existed as both a chip designer and manufacturer, at least until 2009. However, significant capex requirements associated with manufacturing, amid financial troubles in the wake of the Great Recession, compelled the company to demerge and spin off its fab to form GlobalFoundries Inc. (GFS), which has been focused on manufacturing low-end chips ever since.

With the acquisition of ATI, a major fabless chip company, in 2006, AMD began shifting its focus toward chip designing and turned to Taiwan Semiconductor Manufacturing Company Ltd. (TSM) as its exclusive chip manufacturer.

With manufacturing no longer weighing it down, AMD started catching INTC with its Zen line of CPUs. Earlier this year, the former made history by surpassing the latter’s market cap for the first time ever. Chair and CEO Dr. Lisa Su is widely credited with the turnaround and transition from being widely dismissed due to performance issues and delayed releases to being the only company in the world to design both CPUs and GPUs at scale.

We look at how Dr. Su and her team’s unwavering focus on great products, customer relations, and simplifying the company’s structure to respond to the dynamic business with agility are shaping AMD’s offerings in each product category.

CPU Portfolio

Despite a conservative outlook, AMD believes its Genoa CPU processors are superior to competitive offerings in terms of performance and efficiency across diverse workloads, including AI. During the recent AMD Data Center & AI Tech Premiere, the company expanded its EPYC server CPU portfolio by launching the highly anticipated Bergamo EPYC CPUs optimized for cloud environments.

Given the focus on single-threaded performance and energy efficiency, Meta Platforms, Inc. (META), which has collaborated with AMD to customize the design of the Bergamo server, reported seeing 2.5 times greater performance than AMD's previous generation Milan CPUs and notable improvements in total cost of ownership (TCO).

In addition, AMD also introduced Genoa-X as another workload-optimized alternative to Genoa for faster general-purpose computing and optimal technical computing tasks. The company also updated that its upcoming server CPU product, Turin, has shown promising initial results and remains on schedule for a 2024 release.

Data Center Portfolio

According to Dr. Su, Data Center is the most strategic piece of business as far as high-performance computing is concerned. AMD underscored this commitment with the recent acquisition of data center optimization startup Pensando for $1.9 billion.

At the premiere, AMD’s ambitions to capitalize on the AI boom were loud and clear, with the launch of MI300X (a GPU-only chip) as a direct competitor to NVDA’s H100. The chip includes 8 GPUs (5nm GPUs with 6nm I/O) with 192GB of HBM3 and 5.2TB/s of memory bandwidth.

AMD believes this will allow LLMs’ inference workloads that require substantial memory to be run using fewer GPUs, which could improve the TCO compared to the H100.

Lastly, the company aims to address the growing AI accelerator market, projected to be over $30 billion in 2023 and potentially exceed $150 billion in 2027.
Gaming and Other Applications.

While INTC and NVDA control most of the CPU and GPU market, respectively, AMD dominates gaming by designing 83% of gaming console processors.

The recently launched AMD Ryzen 5 5600X3D is equipped with AMD’s revolutionary 3D V-Cache technology. Despite being close to both the Ryzen 7 5800X3D and the non-3D Ryzen 5 5600X in terms of specifications, it comes with a lot of L3 cache, giving it an edge over the latter, thereby improving gaming performance.

Moreover, with Moore’s Law, which is the core of computer chip advancement, showing visible signs of a slowdown and the 5-decade-old x86 architecture gradually but surely being replaced by ARM, general-purpose computing using CPUs is making way for more customized solutions.

That has prompted AMD to acquire Xilinx for $49 billion to close one of the biggest acquisitions in semiconductor history. The investee is known for its reprogrammable adaptive chips called Field-Programmable Gate Arrays or FPGAs, which have diverse applications, such as robotics, telecommunications, agriculture, and space exploration.

As a result, AMD is expanding its footprint from PCs and supercomputers to Teslas and Mars Land Rover.

Road Ahead

Despite its future readiness, geopolitical tensions between the U.S. and China could turn out to be the Achilles heel for AMD since all of its chips are made in China and Taiwan. Also, Mainland China accounts for roughly 30% of the company’s revenues.

Dr. Su also serves on President Biden’s council of advertisers on science and technology, which pushed hard for the recent passage of the Chips and Science Act, aimed at on-shoring and de-risking semiconductor manufacturing in the interest of national security by setting aside $52 billion to incentivize companies to manufacture semiconductors domestically.

Geographical diversification, as a result of this Act, could act as a hedge against geopolitical tensions for AMD by reducing reliance on Asian manufacturing.

Bottom Line

As AMD continues to advance its x86 core computing chips along with diversifying to accommodate high-performance and customized computing, its more than 70% increase in stock price since the beginning of the year (and coincidentally during the AI wave) could be indicative of a company that is poised to gain market share and capitalize on the expanding demand for AI technology in various industries.

Is AI Fueling the Next Tech Bubble? 5 Stocks to Watch

Posted on by The INO.com Team

Artificial Intelligence (AI) is an umbrella term that denotes a series of programs and algorithms designed to mimic human intelligence and perform cognitive tasks efficiently with little to no human intervention. Reinforcement through Machine Learning (ML) changes the game by enabling the models and algorithms to keep evolving based on outcomes.

Unlike other next-big things, such as nuclear fusion, quantum computing, and flying cars, which are practically (and literally) pies in the sky, AI has been around for quite some time, influencing how we shop, drive, date, entertain ourselves, manage our finances, take care of our health, and much more.
However, the technology came into the limelight late last year with the release of ChatGPT, which in its own description, is “an AI-powered chatbot developed by OpenAI, based on the GPT (Generative Pretrained Transformer) language model. It uses deep learning techniques to generate human-like responses to text inputs in a conversational manner.”

The Euphoria

The easily accessible chatbot, believed to be capable of eventually disrupting how humans interact with computers and changing how information is retrieved, took the world by storm by signing up 1 million users in five days and amassing 100 million monthly active users only two months into its launch. To put this in context, TikTok, the erstwhile fastest-growing app, took nine months to reach 100 million users.

ChatGPT is one of the several use cases of generative AI, the subset of algorithms that creates and returns content, such as human-like text, images, and videos, on the basis of written instructions (prompts) provided by the user.

Including this subset, AI in its various forms and applications is capable of analyzing large volumes of data generated during the entire course of our increasingly digital existence and identifying trends and exceptions to help us develop better insights and make more effective decisions.
Given its massive importance, it’s hardly surprising that Zion Market Research forecasts the global AI industry to grow to $422.37 billion by 2028. Hence, this field has understandably garnered massive attention from investors who are reluctant to miss the bus on such a watershed development in the history of humankind.

Although OpenAI, the creator of ChatGPT, is not a publicly listed company, Microsoft Corporation (MSFT) has bet big on the company with a multiyear, multibillion-dollar investment deal. CEO Satya Nadella discussed, at the World Economic Forum held in Davos this year, how the underlying technology would eventually be ubiquitous across MSFT’s products. The process has already begun with updates to its Bing search engine.

MSFT’s rival, Alphabet Inc. (GOOGL), is in hot pursuit. With AI-enabled technology ubiquitous across its platforms, the company has unveiled its response to ChatGPT, called BardAI, with which the company is eager to reclaim its reputation as an early bird in the domain of conversational AI.

Chinese tech giant Baidu, Inc. (BIDU) has also followed suit with Ernie Bot. Amazon.com, Inc. (AMZN) and Meta Platforms, Inc. (META) are also among the notable players in this dynamic domain.

However, more recently, the company which made headlines when its stock got its moonshot due to the widespread public interest in AI is NVIDIA Corporation (NVDA). Post its earnings release on May 24, the Santa Clara-based graphics chip maker has stolen the thunder by becoming the first semiconductor company to hit, albeit briefly, a valuation of $1 trillion.

NVDA’s A100 chips, which are powering LLMs like ChatGPT, have become indispensable for Silicon Valley tech giants. To put things into context, the supercomputer behind OpenAI’s ChatGPT needed 10,000 of Nvidia’s famous chips. With each chip costing $10,000, a single algorithm that’s fast becoming ubiquitous is powered by semiconductors worth $100 million.

The Catch

Notwithstanding all the transformative qualities of AI, investors, who poured a record $8.5 billion of cash into tech funds last week, would be wise to be aware of the limitations and loopholes of investing in technology before FOMO drives them to inflate a "baby bubble" growing in plain sight.

While the technology is powerful (and useful, unlike most cryptocurrencies), the adoption is fast becoming so widespread that it remains unclear how it could help a specific business differentiate itself by developing enduring competitive advantages (read moats) and generating consistent profitability.
Moreover, LLM-based generative AI chatbots such as ChatGPT and BardAI are simply auto-complete on steroids that have been trained on a vast amount of data. While they are really good (and continually getting better) at predicting what the next word is going to be and extrapolating it to generate extensive literature, it lacks contextual understanding.

Consequently, the algorithms struggle with nuances such as sarcasm, irony, satire, analogies, etc. This also leads to the propensity to “hallucinate” and generate responses even if those are factually and logically incorrect.

Additionally, with the widespread adoption of LLMs and other forms of generative AI, a massive amount of content will be ingested and regurgitated as canned responses echoed in infinite permutations and combinations. This oversupply could dilute the value and increase demand for qualitatively superior insight and discernment, which (still) requires human intervention.

(Relatively) Safe Havens

Just as we have learned during the dot-com, cryptocurrency, real estate, and numerous other bubbles through the ages, markets can stay irrational longer than investors can stay solvent.

Therefore, even if the next big thing comes along and changes the world (and electricity, automobiles, personal computers, and the Internet really did), it’s the fundamentals that determine whether a business can survive to capitalize on those windfalls.

Hence, it could be wise and safe for investors to stick to big tech mega caps (mentioned earlier in the article), which are involved in providing the infrastructure and computing horsepower required to make the data and power-hungry AI algorithms work.

Moreover, since AI is well-embedded into their business operations and market offerings and AI as a service is (still) a small portion of their revenue, concentration risks can be more easily managed.

Bottom Line

Rather than getting too carried away and stretching a worthwhile and useful innovation to frothy excesses with unrealistic expectations, it could be useful to remember that legendary investor and polymath Charlie Munger doesn’t think that AI is the silver bullet that can solve mankind’s pressing problems all by itself.

Even AAPL co-founder Steve Wozniak, who knows more than a thing or two about technology, agrees with the ‘A’ and not the ‘I’ of Artificial Intelligence.
We hope this discourse will help investors cultivate discernment, discretion, and, if necessary, dissent while investing in this revolutionary technology since those are the ultimate indicators of intelligence.