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🦾 AI Hype in the Stock Market
📊 The stock market is going crazy over A.I.
This is a Guest post by Giuliano, the author ofa Newsletter about fundamental principles of the Stock Market. We were chatting about how enthusiasm for A.I. is impacting the stock markets in early 2023. He was gracious enough to offer to write about it.
In recent times, many stocks have been impacted by this trend including:
BIDU 0.00%↑ Baidu, who are introducing Ernie into their search Engine.
BZFD 0.00%↑ Buzzfeed, who are flirting with using A.I. more in their coverage.
AI 0.00%↑ C3.AI who launched a Generative A.I. Product Suite. Among so many others.
Here is his take on this trend:
AI Hype in the Stock Market
Hi, it’s Giuliano writing! I’m very grateful to Michael for inviting me here. This is the first time I get hosted in another writer’s Newsletter. Anyway, I hope you enjoy the article.
So let’s get into it:
Asset prices are defined by signals people give, in the form of buying or selling. These decisions are taken at an individual level, according to infinite factors. The most important of them, generally, is what’s the expected return of an asset, in contrast to the risk such asset supposes. That’s why the market is forward looking, because it’s on the future where people place their decisions and, at the end of signal’s chain, prices are set.
Since that’s the case, every event affecting people’s future expectations will invariably lead to a change in their decisions. About two months ago, a brand new product was publicly released (in its beta version), Chat GPT. Fast forward to today and this unique ‘search tool’ has reached 100M users, the fastest usage growth achieved in history.
Now, imagine how big of an event this is. This disruptive search engine that leverages Artificial Intelligence has led to a complete change in people’s future expectation in regards to AI. The following chart displays how rapid AI search rose.
Source: Google Trends
Interest in ChatGPT Skyrockets
An almost vertical rise in Chat GPT searches have occurred since its release, with the curve continuing in a pronounced uptrend in 2023.
The reason for me mentioning this is because it’s the most relevant event that has taken place in the AI space for the past few years. Things of this magnitude not only affect future expectations, but they also spill. The following chart illustrates how Chat GPT spilled to the general market and how the market started absorbing this new knowledge to then price it into assets.
Source: Google Trends
That’s how hype is built and how it reinforces itself, making people bid higher and higher for assets such as stocks, potentially achieving crazy returns in a short time span. Here’s an example of how the trend has affected AI stocks in 2023 within different industries and sizes. Keep in mind this article is being written on the 6th of February.
I’ll provide some context below on how are these companies are related to the AI space.
If you are interested in the stock market, here is where I write weekly articles:
Microsoft and Google
Microsoft and Google are both very intricated in this industry and I decided to group them together on this section given the very recent ‘war there’s been between them.
Microsoft is one of the leading companies in the technological world and they have a vast portfolio of products exposing them to artificial intelligence, automation and machine learning. Microsoft Azure is their cloud computing player, a very heavy weight.
The interesting thing Azure has is it allows Microsoft to leverage their cloud capabilities to improve products they already offer in parallel. For example:
Windows Virtual Desktop and Windows Server run on Azure
GitHub copilot (an AI coding assistant) is powered by Azure
Dynamics 365 (CRM/ERP with automation and ML capabilities) runs on azure
Nuance (Conversational AI and Ambient Clinical Intelligence company owned by Microsoft) uses many of Azure’s capabilities
You see where I’m going? Microsoft offers a LOT of ML/AI/automation capabilities through their different products and they are all powered by Azure. Furthermore, the most brilliant AI coders have recognized that Microsoft has the best infrastructure for building AI:
“Microsoft, and particularly Azure, don’t get nearly enough credit for the stuff OpenAI launches. They do an amazing amount of work to make it happen; we are deeply grateful for the partnership. They have built by far the best AI infra out there.” Sam Altman (OpenAI CEO)
“Copilot has dramatically accelerated my coding, it’s hard to imagine going back to “manual coding. Still learning to use it but it already writes – 80% of my code, - 80% accuracy.” Andrej Karpathy (former AI Director at Tesla)
OpenAI, the company behind Chat GPT, has been running their workloads on Azure for almost ever and, a few weeks ago, an announcement was made. Microsoft would invest 10bn into OpenAI under the following parameters:
Microsoft will enhance and accelerate OpenAI’s AI research and ecosystem
Microsoft will leverage OpenAI’s models to improve their products. They already announced the intention of utilizing Chat GPT to improve Microsoft Edge (this has been announced on Tuesday haha)
Azure will be OpenAI’s exclusive cloud provider
I do not intend to overwhelm you with information on Microsoft. However, if you are interested in reading more on the company, I wrote a deep dive on it I believe you’ll really enjoy.
Anyway, that’s how fully intricated Microsoft is with Artificial Intelligence. Though, this is a very large and promising industry, which is the reason why it attracts many eyes. And here’s where Google enters the equation.
The appearance of Chat GPT raised a severe concern in the search space. Suddenly, it no longer appears as if Google Search is the most efficient tool to use for such purpose. Moreover, Microsoft’s support to OpenAI is extremely dangerous to Google, since it means OpenAI will have almost unlimited resources to compete. This made Google take action and announced the following two things in the last week.
1. It invested 300M in an AI startup called Anthropic (covered in this Newsletter)
2. It announced a Chat GPT competitor called Bard! Here’s Sundar Pichai’s tweet on it:
Very similar moves to those of Microsoft. The competitive landscape has turned very interesting.
Moving on, I’ll cover the other mentioned stocks for you to have some context on how they could be potential riders of this wave.
This is not at all financial advice, just providing you with some names and information. You can dive deeper into them if you want to.
C3 AI is a software company that, as the name indicates, provides AI solutions to organizations in different industries. By leveraging AI, ML and cloud computing, helps businesses solve complex problems and improve efficiency. Among their offerings, there’s:
· C3 AI Application Platform is an app development and runtime environment meant to design and deploy AI apps.
· C3 AI Applications are pre-built AI applications in the platform, instantly deployable
· C3 AI Ex Machina is a no-code, ML solution for data scientists
· C3 AI CRM allows customers to apply AI features into their CRM systems
· C3 AI Data Vision is an AI driven app for advanced data visualization
Crowdstrike is a cybersecurity company with an AI-powered algorithm for detecting threats. Using cloud-scale AI, Crowdstrike’s Security Cloud enriches and correlates trillions of cybersecurity events per week with indicators of attack, threat intelligence and enterprise data to create actionable data, identify shifts in adversary tactics and automatically prevent threats in real-time.
The company has built the cloud-based Falcon Platform and, upon it, has vertically developed different cloud modules and features they offer via a SaaS model. As of today, Crowdstrike offers more than 22 cloud modules on their Falcon Platform.
Source: Crowdstrike Investor Presentation 2022
Duolingo is a platform for learning languages, basically. It offers different courses, interactive lessons, reading, writing, speaking and listening exercises. At the same time, it offers students with the possibility of doing their languages exams, which are widely recognized by educational institutions as a knowledge certificate.
The platform uses AI algorithms to personalize the learning experience for each user by adapting to their learning pace and style, and to track their progress. At the same time, they utilize AI to grade exercises, for speech recognition capabilities and ML to optimize the order of lessons.
Source: Duolingo Q3 2022 Shareholder Letter
Nvidia designs and manufactures Graphic Processing Units (GPUs) and system on a chip (SoC) units. The company’s GPUs are used for gaming, artificial intelligence, machine learning and scientific computing. At the same time, Nvidia produces processors for self-driving cars. Quote from one of their presentations:
“Data centers across industries will become AI factories”
Source: Nvidia 2022 Investor Presentation
Palantir is a technology company that provides data analysis software for government agencies and commercial organizations. The platform incorporates AI and ML algorithms to help organizations make sense of large and complex datasets. Palantir’s AI and ML technologies are also used for data processing automation, tasks analysis, pattern identification and decision support for users. Lastly, the business’ products are designed to support development and deployment of AI-based solutions.
Source: Palantir 3rd Quarter Earnings Results
Tesla is mainly an electric vehicle company. However, over the past decade it has built renewable energy solutions like solar panels or energy storage, and a very peculiar software, the ‘FSD’. Tesla’s AI team, previously managed by Andrej, have been building their Full Self-Driving software to implement on cars. And here’s the reason why this could literally make Tesla an AI player. This is something (I’m paraphrasing) Elon said in an interview that really struck me:
“There was some point in the road where we could not advance and that’s when I figured out that to solve FSD we had to solve AI.”
Source: Tesla 4th Quarter Earnings Results
Fast forward to today, and an AI prototype robot has been shown in their last investor’s day.
I wrote a deep dive on the company, if interested:
UiPath is a leading provider of Robotic Process Automation (RPA). Through their platform, the company helps businesses automate various manual, repetitive and time-consuming tasks. UiPath leverages AI and ML algorithms to automate tasks such as data entry, customer service and back-office processes, enabling organizations to increase efficiency and reduce costs. Lastly, the platform counts with the necessary features for employees to build automations solutions for new and existing processes.
Source: UiPath 3rd Quarter Financial Results
Upstart is, basically, a cloud-based AI lending platform.
“We leverage the power of AI to more accurately quantify the true risk of a loan. Our AI models have been continuously upgraded, trained and refined for more than eight years. We have discrete AI models that target fee optimization, income fraud, acquisition targeting, loan stacking, prepayment prediction, identity fraud and time-delimited default prediction.”
“Our AI models are provided to bank partners within a consumer-facing cloud application that streamlines the end-to-end process of originating and servicing a loan. We have built a configurable, multi-tenant cloud application designed to integrate seamlessly into a bank’s existing technology systems”
Source: Upstart 3rd Quarter Earnings Results
There was a lot of things I wanted to cover, but I did not want to overwhelm haha. I never wrote anything mainly focused on this topic, but it was very exciting to do so. I hope you enjoyed the article and, if you have, feel free to check my Newsletter where I cover many companies and stock market principles!
Best, Giuliano (Twitter)
Thanks for reading!