Artificial intelligence is an awesome development but the hype doesn’t match the revenue

The monetisation of artificial intelligence is essential for the tech bubble to transition into a bona fide boom.

While Google, Meta, Microsoft and Amazon battle it out in the AI race, we all know Nvidia is raking in billions by producing the GPUs they require while simultaneously sending its market cap into the trillion-dollar club alongside its major customers.

Seven mega-cap companies – Meta, Apple, Microsoft, Alphabet, Nvidia, Amazon and Tesla – are responsible for 100 per cent of the gains in the US market this calendar year, despite laying off thousands of employees amid a major business downturn.

Their share prices have returned 50 per cent, while an MSCI index excluding these seven companies is unchanged since the beginning of the year.

Meta and Facebook chief Mark Zuckerberg. Picture: AFP

The critical question on my mind is how Nvidia’s customers will recoup the $US40,000 per chip spent on each of the tens of thousands of chips they’re purchasing, and monetise their AI investment. The corollary is how their recent share price rallies can be justified in the absence of clear monetisation strategies.

My inbox is inundated with a litany of stories of undeniable efficiency gains, each variously describing ChatGPT being employed by busy families to meal plan, by doctors to help with their bedside manner, by job applicants to write resumes and covering letters, by businesses to design products or come up with creative marketing content and of course by criminals and scammers for more nefarious purposes.

But at best, these users are directly paying OpenAI $20 per month for ChatGPT4. Most, however, are likely to be using the free version.

So how will Nvidia’s mega-cap customers generate revenue from the integration of large language models into their offerings? And will that additional revenue be a multiple of existing revenue or merely incremental?

The way their share prices are performing, you’d think a seismic shift in revenue is in the offing. I’m not convinced yet.

Meta wants to integrate artificial intelligence into its existing services.

(formerly Facebook) and Google have attempted to address this dilemma, as evidenced by their recent moves. Both tech giants are pioneering the integration of AI into their existing services, while also focusing on security.

Meta chief executive Mark Zuckerberg recently announced ambitious plans to incorporate AI text, image, and video generators into its flagship products, including Facebook and Instagram. This indicates a significant shift towards generative AI technology within Meta’s product suite.

Tellingly, Zuckerberg emphasised that these implementations align with the company’s metaverse expansion efforts rather than replaces them.

Customers will soon be able to modify their own photos using text prompts and share them on Instagram Stories. Messenger and WhatsApp will see the introduction of AI agents with distinct personalities and capabilities designed to assist or entertain users.

Further, Meta has taken initial steps into the world of microblogging by previewing Project 92, a potential Twitter rival for Instagram.

But importantly for investors, the announcements offer little insight into how, other than by wowing and entrenching existing customers, any of the advancements will increase revenue or profits for Meta.

Meanwhile, Google has put some more meat around its Secure AI framework to help organisations apply basic security controls to their AI systems and guard them against cyber threats. Cybersecurity and safety typically take a back seat in a technology arms race or land grab, so Google has emphasised that many AI risks can be managed with basic controls.

But again, there isn’t much to suggest augmenting existing systems with secure AI will augment revenue for Google.

Among other suggestions, Google’s framework encourages organisations to extend existing security controls, such as data encryption, to new AI systems, broaden their threat intelligence research to include specific threats targeting AI systems, integrate automation into cyber defences to rapidly respond to suspicious activity targeting AI systems, and build a team knowledgeable about AI-related risks.

At best, users are paying OpenAI $20 per month for ChatGPT4 but are more likely using the free version. Picture: AFP

Google chief information security officer Phil Venables suggested that many of these security practices were already used in mature organisations. An investor may reasonably ask how this increases revenue or profits if that’s the case. Google is simply collaborating with its customers and governments to encourage the adoption of its principles.

Some end users, however, are taking the first tentative steps towards paying giant cloud computing providers like Amazon Web Services for their AI offerings. Earlier this year, Westpac revealed it had signed an agreement with AWS to provide its generative AI technology to help the bank write better letters to customers and to assist its software engineers with coding.

So, while there’s little doubt AI is beginning to reshape our digital landscape, it appears AI remains something of a novelty – much as the release of Apple’s App Store saw everyone turn their iPhones into a torch.

More importantly, the revenues remain incremental rather than transformative, which doesn’t justify heady share price multiples.

Companies like Meta and Google are driving to integrate AI into everyday applications while ensuring it’s anchored in security. These don’t initially appear to be revenue-enhancing developments. And wider adoption is likely to benefit the consumer more than the companies offering AI enhancements.

The wide divergence between the booming share prices of Nvidia’s major customers and almost every other stock will need to be supported by more than AI hype.

While AI’s implementation and benefits have been recognised in various sectors, substantial growth in revenue and profits will be essential to sustain the recent heady share price gains of the mega-cap technology companies, which in turn have driven the broader market’s returns.

And so far, there’s little being said about the revenues required to justify the enthusiasm.

Roger Montgomery is founder and chief investment officer at Montgomery Investment Management.