It was the week of AI on Wall Street. After Apple presented its AI plans on Monday, things remained quiet for a while, but after a day's respite, the stock market hit a complete snag on Wednesday: Apple briefly overtook Microsoft as the world's most valuable company, while just last week it had lost the second spot to Nvidia. What is wrong with these investors? Why the absurd price swings of hundreds of billions?
Billions of dollars
As of June 14, Apple, Microsoft and Nvidia have all passed the milestone of a $3 trillion market value, making them an exclusive "trillion-dollar" club. Due to enthusiasm among investors about the upcoming introduction of AI applications and ChatGPT in the iPhone, Apple briefly regained the title of the world's most valuable company with a market capitalization of $3.283 trillion, just slightly higher than Microsoft's at $3.282 trillion.
Meanwhile, Nvidia's stock price also rose steadily, driven by investor excitement over Nvidia's 10-for-1 stock split. Nvidia's market capitalization experienced a meteoric rise, from $2 trillion to $3 trillion in a record-breaking 96 days, faster than Microsoft (649 days) and Apple (718 days).
Nvidia's dominance in AI chips and strong earnings growth have fueled share price gains, with shares up more than 132% this year and 193% in the past year. But on Friday, Apple's share price fell slightly, Microsoft rose slightly and so Microsoft ended the stock market week as it began: as the world's most valuable company.
Everyone was buying iPods, not AAPL
Let's face it: if the so-called investment gurus understood anything about technology, they would have been buying Nvidia shares en masse years ago. But just as there was no one 21 years ago who, instead of buying an iPod at that price, $300, bought shares of Apple (which would be worth $137, 000 today), there is virtually no professional investor who has been in Nvidia for more than, say, five years.
Professional fund investors are as big amateurs as you and me. Why are Apple ($3.26 trillion), Microsoft ($3.29 trillion ) and Nvidia ($3.24 trillion) now worth almost as much? Ask any analyst or investor and they'll say in chorus: because of AI. That's like an artist manager saying, "Doesn't matter if I'm manager of Taylor Swift or Country Wilma, they're both singers.
The market does not seem to understand that these are totally different companies with different approaches to revenue, costs and possibly profits from applications of AI. But their perspective is totally different.
Nvidia makes pickaxes, Microsoft is mining
With AI, we can speak of pure gold rush, so let's keep that metaphor. In this gold rush, Nvidia makes the shovels and picks that every miner needs. Amazon, Meta, X, Tesla, Oracle, go down the list of tech giants: all, like Microsoft, use Nvidia's shovels and picks.
There is no alternative that delivers the same performance per dollar invested, which is why Nvidia's revenue growth and profit margins are already legendary. The question is how long Nvidia can maintain this position, but at least for the next few years.
Microsoft is the biggest miner, with worldwide data centers full of Nvidia stuff. At Microsoft, unlike Nvidia, the question is whether those billion-dollar investments will lead to sufficient margin. The first noises are already being heard that Microsoft's customers are not at all achieving the intended improvement in returns based on Microsoft's AI applications.
This will obviously lead to price erosion and lower sales and undermine investor confidence in Microsoft's AI plans because the costs are astronomical. These are not investments of billions, but tens of billions, and they will start to gnaw away at the profit margin.
OpenAI is goldsmith, Apple the jewelry maker
OpenAI sits just a layer above Microsoft: it uses Microsoft's data centers and cloud services to forge gold, demanding maximum power from Nvidia chips. Demand for OpenAI's technology, particularly its flagship ChatGPT, has been huge. Meanwhile, OpenAI is heading for annual sales of nearly $3.5 billion.
That's why shareholder Vinod Khosla remains unabatedly optimistic. No wonder, he stepped in at a valuation under a billion and has already seen his investment increase hundredfold in value. Then I would also smile affably at the criticism of OpenAI.
OpenAI, led by Sam Altman, likes to leak revenue figures; but we hear nothing about its burn rate, its losses. This is no wonder, because in fact OpenAI pays heavily to two suppliers: Microsoft and Nvidia. Both seek maximum profit, and so OpenAI burns billions a year. The billions it invests in OpenAI, it largely gets paid back by services provided.
No, then Apple, the jewelry maker of AI mining. It builds AI applications here and there into its operating system and applications, which they don't call AI but Apple Intelligence, but the cost of these, viewed in the big picture at Apple, is virtually marginal. And the partnership with OpenAI announced big Monday costs Apple nothing at all.
What Apple does is create elegant, easy-to-use products that improve everyday life, similar to turning raw gold into fine jewelry. Apple's ambition is to offer consumer products and services that seamlessly integrate AI to improve our daily lives. The only question is: Will those AI ambitions from Apple work this time?
Apple Intelligence is Siri 2.0?
Investor and former journalist MG Siegler rightly points to all of Apple's previous attempts to get Siri working properly. It's the same pain point Marques Brownlee pointed out in conversation with Apple CEO Tim Cook.
More than two billion iPhone owners will get an update before the end of the year that will allow them to enter the AI era - provided their iPhone can handle it and, as a result, Apple may well get a huge sales boost from the iPhone 15 and the new iPhone 16, while for years renewing your iPhone was virtually unnecessary.
By the way, it's remarkable how times have changed: just last week I pointed out a podcast with legendary Wall Street Journal reporter Walt Mossberg, who terrified the entire tech elite. Nowadays, it's YouTuber and professional frisbee player Marques Brownlee for whom the red carpet is rolled out at the introduction of a new product.
Traditional journalism is struggling to make sense of Apple's introduction of AI applications. This makes sense in itself, as it is all still future music and nothing can actually be tested yet.
It's just sad that the Washington Post didn't get much further than to point out the hilarious pose with which all Apple employees are portrayed these days. It has since been flatteringly christened the "Apple Power Stance," but surely the Dutch know this position better as Bassie's spreading stance on his floppy shoes.
Too much focus on LLMs and Generative AI
Those who would have followed the technology sector from some distance this week would undoubtedly get the impression that Large Language Models (LLMs) such as ChatGPT and Google Gemini, are the only and most important form of AI.
But criticism of the hundreds of billions being thrown into this branch of AI is rightly growing louder. Martin Peers of the Information has a sharp analysis:
"Despite the ubiquity of AI in news reports, one issue does not get enough attention: Are the advances that society will gain from the new technology worth the cost? By cost, I specifically mean the impact on energy supplies. The energy demands of data centers threaten to deplete energy resources, pushing back efforts to switch from carbon-emitting energy sources.
And for what? Judging by how some technology companies market their AI-driven services, it's about helping consumers design a menu for dinner, plan a vacation or find a photo on their phone. (The idea, of course, is to get consumers to spend money on new devices or AI subscriptions.)
Or it's about helping companies improve employee productivity, including cutting jobs (great!). Despite the attention these applications have attracted, AI's real promise undoubtedly lies in its potential to solve existential challenges such as deadly diseases or dangerous drivers.
Efforts to use the new technology in those directions are already underway. Google, for example, has its AlphaFold project aimed at accelerating medicines for diseases. Elon Musk is making AI the centerpiece of his efforts at Tesla to develop fully autonomous driving. Microsoft, meanwhile, is using AI to improve cybersecurity, among other things - an effort that can't come soon enough.
Data breaches at large companies - including recently at Snowflake, which affected several of its customers - have become so commonplace that they attract little attention, despite the pain they cause. No one knows the problem better than Microsoft, whose chief executive, Brad Smith, was addressed Thursday in a congressional hearing about the company's cybersecurity shortcomings.
But fighting deadly diseases, solving autonomous driving and even improving cybersecurity are not cheap or fast ventures. Yet large technology companies are spending tens of billions of dollars to develop AI, so they need a return. The danger is that the need for quick returns from consumer and business services will distort investments, neglecting more important needs.
Unlike AI startups like Anthropic and OpenAI, large companies are not run by non-profits that require them to put the interests of humanity first. Let's hope that AI's greatest advances don't turn out to be trivialities, like saving consumers a little time while playing with their phones."
"LLMs suck oxygen out of any space"
Leading thinker on technology Jennifer Zhu Scott puts it this way: "LLMs suck all the oxygen out of any room I enter. Again, a reminder:
- LLMs will eventually become commonplace
- LLMs are the playing field for only a handful of firms in the world
- LLMs are not the future of truly advanced AI; instead, a more efficient architecture that requires less data/calculating power/energy and is more like biological brains is the future.
- LLMs cause a huge carbon footprint and water consumption, and much of the output is credible nonsense, meaningless "art," deep fake and massive privacy invasion
- Praise to those who keep their LLMs open-source
OpenAI's release of ChatGPT3 in November 2022 set in motion this mad race of LLMs and has delayed the progress of advanced AI by at least five years."
Earlier, Jen Zhu Scott said, "It's simple. We won't get to Mars by building taller buildings on Earth. Where Mars stands for general artificial intelligence, or AGI."
LLMs, as clever as some applications are, remain advanced forms of the best player in a pub quiz or the scholar who always raises his finger trying to give the answer. Only the answer does not always turn out to be correct, and the facts that the diligent scholar spits out are based solely on learned knowledge.
Fundamental technology that advances society, e.g. helps eliminate disease, will not be developed on the basis of LLMs. This puts the billion-dollar investments and trillion-dollar valuations for companies engaged in the current form of AI, LLMs, in an increasingly questionable light.
See you next week!