A curious paradox should make all pause: a good number of companies with soaring stock prices are reducing their workforce or issuing cautious guidance. This contradiction must be juxtaposed with the market's fixation on GenAI's more rudimentary applications, such as chatbots and AI co-pilots. The evidence of these likely transient phenomena not taking off as expected is rising, and they will likely cast heavy doubts on GenAI's more important utilities when markets suddenly notice their disappointments with sharp falls in some of today's best-performing stocks.
Time to be careful here: There is nothing so far to doubt GenAI's phenomenal long-term theme and its role in turbocharging innovation in various fields. But right now, the market's got a bad case of tunnel vision, fixated on co-pilots and chatbots like they're the next sliced bread. And the reality is different except not in share prices.
OpenAI's paid subscriber growth has likely decelerated to fairly normal levels despite a bevy of new features. The numbers are likely so weak that one does not even hear whispers of staggering revenues anywhere in the LLM space. Microsoft's co-pilot announcements make headlines, but there are few shoutouts from new users. Bing's inability to take even a tiny market share from Google exemplifies the inability to surpass early adopters in current forms.
Better form factors than primarily web-based chatboxes will help, but more if mobile devices begin using personal data seamlessly to play the roles of digital assistants. This is definitely in the quarters ahead, but the half-baked interim versions are unlikely to impress, as is becoming apparent with relatively lackluster launches of Samsung's new phone or new devices from certain start-ups.
The problems are non-trivial, particularly against expectations. Analysts, pressured by those sky-high stock prices, are crafting ever more aggressive narratives in the US. They paint pictures of endless LLM growth and GPU gold rushes, conveniently forgetting training- and inventory-build-related one-offs of 2023.
Deep picks and shovel plays like equipment and software providers whose revenue growth prospects are less extreme than the chipmakers and designers have seen similar valuation explosions. The flip side of stock price booms with marginal positive earnings surprises is the tragedies of those who disappoint even somewhat – another feature of a bull market running on internals more than fundamentals.
Thematic diversification in innovation and valuation focus will help when markets calm. However, any sharp corrections led by traditional cyclicals will also test convictions in the long-term prospects of GenAI, particularly those who have reduced it all to chatboxes and co-pilots, distilled mainly in the form of investments in semis and the largest of the hottest market.
