June 14, 2024

The AI revolution is hotter than ever — but investors should be realistic about its timeline

Investors are once again piling into the AI trade — but those looking for a fast return should think twice.

Nvidia (NVDA) shares hit a record intraday high this week ahead of its 10-for-1 stock split, while new product announcements have fueled demand for stocks like AMD (AMD), c3.AI (AI), and Super Micro (SMCI).

Despite Wall Street’s unrelenting excitement surrounding the new technology, a reality check may be necessary. I spoke with top business leaders at Bank of America’s global technology conference earlier this week, who are warning of impractical expectations.

Nutanix (NTNX) CEO Rajiv Ramaswami told me that while he’s excited about the revolutionary technology, “AI investments have gotten ahead of reality.”

“There has to be a valid business case … to justify the cost of AI investments. There’s a little bit of a disconnect between those two right now,” Ramaswami said.

Though there are a slew of applications for AI — from text and video generation to predicting demand for supply chains — many tech companies have yet to see tangible returns from their AI investments. Meanwhile, building out AI applications, which requires intense computing power, is expensive.

“There are good use cases. I’m not suggesting there aren’t good use cases … We just need to make sure they’re economically viable,” Ramaswami added.

Meanwhile, Pure Storage (PSTG) founder John Colgrove advised that it’s important to maintain a realistic timeline for AI’s expected impact on real life. He warns that expectations are “overhyped” in the short-term.

“AI is going to be transformative, but it is going to take a little longer than people think. What they think will happen over the next 10 years is probably going to take 25 years,” Colgrove said.

“It’s going to happen, but it takes a little longer to build out the infrastructure and to really get the effects everywhere.”

On the startup front, excitement has already been tempering. Following a massive surge for several quarters in a row, VC deal value for pre-seed and seed-stage AI startups is beginning to decline.

Deal value totaled $122.9 million in the first quarter, down 76% from a peak in the third quarter of 2023, according to the latest data from PitchBook.

The driving factors are questions surrounding profitability.

For investors trying to navigate the hype surrounding AI, there are still reasons to increase exposure, even with expectations of a “lagged effect,” according State Street’s Michael Arone.

Arone told Yahoo Finance that investing in companies “laying the groundwork for massive adoption” are the best way to play AI. It’s the companies behind data centers, GPUs, software, and cloud services — those providing the essential tools supporting the AI revolution.

“We really need to move from the AI possibilities to the practical implications of AI … And while there will be a “lagged effect” for companies incorporating AI technology into their products, early builders of the infrastructure and the foundation are the winners,” Arone advised.

“The winners and losers will become more evident as we move forward,” he added.

Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.

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