It Don’t Come Easy

We’ve been concerned that the Street’s view of AI has been a bit ‘one-sided’, that is, looking only at the benefits, and not focusing on the costs. That may have come to an end this week as AI had its first collision with reality when Meta offered weaker Q2 revenue guidance on Thursday and upped their capital spending for the year by some $5 billion as they aggressively pursue AI development. That leads us to Ringo’s lyrics as our title this week:

“Got to pay your dues if you want to sing the blues

And you know it don’t come easy”

Meta’s CEO, Mark Zuckerberg had this to say:

“It’s worth calling that out that we’ve historically seen a lot of volatility in our stock during this phase of our product playbook, where we’re investing in scaling a new product but aren’t yet monetizing it, but building the leading AI will also be a larger undertaking then the other experiences we’ve added to our apps and this is likely going to take several years.”

NVIDA (NVDA) was up on the news because more spending from AI developers means more revenue for NVIDIA, but it’s only natural that the other top AI competitors could have experiences similar to Meta this quarter or in the future. All the big AI model developers, Meta (META), Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT) were very weak, but especially Meta.

After the close on Thursday, both Microsoft and Alphabet reported strong earnings, and the lack of any current follow through on the Meta announcement caused a quick recovery. But keep an eye of future quarters because AI spending is not slowing down, and competitive forces could actually accelerate spending even from the current very high levels.

Implications for the Broader Market

The stock market run up from last October has been waning recently and this Meta news re-enforce that trend., at least for that day This six-month rally has been driven largely by valuation (that is, higher P/E multiples). With multiples now on high side, the implication is that from here, we are more dependent on earnings growth to drive the stock market higher. AI could help that earnings growth materialize, or as is the case with Meta, the cost of development could hurt earnings in the short run. The point is that any tech weakness has the potential to spread to the broader market. The Meta results have us on watch for any ‘contagious’ impacts.

The Long Run

In the long run, it is very hard not to envision AI as a transformative technology, although t is far too early to judge the likely pace of adoption. What history tells us is that the leaders of one era are unlikely to be the leaders of the next era. For investors in our Emerging Growth Strategy, we continue to invest in those companies that we believe will be the disruptive forces of the future, while accepting the expected volatility in the meantime. Nobody rings a bell when new technology hits, you simply have to be there when it takes hold. With apologies to Ringo, we slightly alter his lyrics:

“Got to pay your dues while you’re waiting for good news

And you know it don’t come easy”

Have a great week!

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By: thinkhouse