The Financial Side of Artificial Intelligence – All We Know Now

Since the end of March, many things have happened with AI from investment, revenue, spending, expense, and profitability standpoints.  What are they, and how do they look from here?

First, we had “OpenAI Completes Deal That Values Company at $300 Billion” (Cade Metz, The New York Times, March 31^st).  That’s from “the new fund-raising round, led by the Japanese conglomerate SoftBank,” which is lending it $40 billion and pegs it as “one of the most valuable private companies in the world, along with the rocket company SpaceX and ByteDance, the maker of TikTok.”

Perhaps then, it is controversial to ask “Will OpenAI ever make real money?” (Schumpeter, The Economist, May 17^th).  Thie piece also discussed ByteDance and SpaceX, each with an “underlying technology” which has not “dramatically changed” since their first successes in 2008 and 2016, providing “stability” that “has enabled both firms to build products and, in time, business models around them” which have been “lucrative.”  OpenAI’s problem is “the sheer pace of AI innovation” which serves to “upend (its) economics.”  High operating costs have forced OpenAI to take “mounting losses,” last year “perhaps $5bn (excluding stock-based compensation),” and, with 2025 expenses predicted to grow substantially, even though the company expects its “revenue to triple again” it may not be profitable.

A familiar financial danger popped up in “Wall St. Is All In on A.I. Data Centers.  But Are They the Next Bubble?” (Maureen Farrell, The New York Times, June 2^nd).  As “data centers are drawing a crowd on Wall Street,” because “investment giants like KKR, BlackRock and Blue Owl have collectively plowed hundreds of billions into the industry,” there have been recent problems, such as that “some technology companies, including Microsoft and Foxconn, have stepped away from some leases,” so a few analysts are questioning how long the boom can last.  Yet there are tens of billions of dollars worth of new construction elsewhere, including all over the United States as well as in Australia, the United Arab Emirates, and elsewhere in Asia – so all we have here is a mass of activity almost certainly to be followed by some successes, some consolidations, and some failures.

That view was reinforced in “The A.I. Frenzy is Escalating.  Again,” once more by Metz in the Times on June 27^th.  He told us that “the tech industry’s giants are building data centers that can cost more than $100 billion and will consume more electricity than a million American homes,” “salaries for A.I. experts are jumping as Meta offers signing bonuses to A.I. researchers that top $100 million,” and “U.S. investment in A.I. companies rose to $65 billion in the first quarter.”  Overall, “Meta, Microsoft, Amazon and Google have told investors that they expect to spend a combined $320 billion on infrastructure costs this year.”

Perhaps it was only a matter of time, even if not normal practice, that “U.S. Government to Take Cut of Nvidia and AMD Chip Sales to China” (Tripp Mickle, The New York Times, August 10^th).  Per this “highly unusual financial agreement,” the companies will be allowed to sell their chips to China and will avoid a “100 percent tariff” to be levied “on semiconductors made abroad, unless (their manufacturers) invested in the United States.”  We will see just how and when this plan, which mixes taxation and national security, materializes.

More concerns about earnings, this time by users, were raised in “Companies Are Pouring Billions into A.I.  It Has Yet to Pay Off.” (Steve Lohr, The New York Times, August 13^th).  “According to recent research from McKinsey & Company, nearly eight in 10 companies have reported using generative A.I., but just as many have reported “no significant bottom-line impact.””  Forty-two percent of firms, compared with 17% the previous year, were found to be “abandoning most of their A.I. pilot projects… by the end of 2024.”  According to an analyst, that has happened “not only because of technical hurdles, but often because of “human factors” like employee and customer resistance or lack of skills.”  The “chief forecaster” at Gartner, a long-time “research and advisory firm,” “predicts that A.I. is sliding toward a stage it calls “the trough of disillusionment,”” with the very bottom “expected next year, before the technology eventually becomes a proven productivity tool.”  In general, “the winners so far have been the suppliers of A.I. technology and advice,” which “include Microsoft, Amazon, and Google” along with Nvidia. 

Also profiting, immensely, have been investors in many AI-related companies.  Will that continue?  Maybe, but certainly not in a straight line.  Even if artificial intelligence lives up to its press, expect shocks, even corrections, in the values of its securities.  AI may turn out to be the innovation of the century, or it may go the way of artificial hearts, once predicted to be commonplace; 3D printing, useful but nowhere near matching what many forecasted for it; or autonomous vehicles, succeeding only slowly and in niches.  We won’t know for a long time – so, as in so many other ventures, you pays your money and you takes your chances.