The Battle for AI Dominance Begins

The mania surrounding artificial intelligence (AI) is beginning to move stocks beyond the traditional fundamentals.  For example, Alphabet (GOOGL) tumbled nearly -8% Wednesday, its biggest rout in more than three months, as concerns surfaced about the reliability of the company’s AI chatbot Bard.  The fact that Wednesday’s selloff was bigger than the -2.8% sell-off seen last week when Alphabet missed its earnings estimates shows how important AI success has become to investors.

Big tech companies have been under pressure to develop their AI platforms since developer OpenAI launched its wildly popular chatbot ChatGBT in November.  However, some analysts are concerned that investors are becoming caught up in AI mania.  Regarding the nearly -8% slump in Alphabet on Wednesday, Miller Tabak said, “for a stock like Google to get knocked down this much, it just shows you that people aren’t even looking at the fundaments.” 

Microsoft (MSFT) on Tuesday rallied more than +4% after it said it would incorporate OpenAI’s ChatGBT technology into products like its Bing search engine.  Piper Sandler said AI’s potential in the $500 billion+ digital ad market is enticing, and Citigroup has a buy recommendation on Microsoft, saying the company seems to be “well positioned” to gain some share with access to leading AI models and innovation.  However, Morgan Stanley thinks it will be tough for Microsoft to compete in the search and digital ad space dominated by Alphabet, as changing consumer behavior can be a difficult and expensive endeavor.

Until recently, the speculation surrounding AI in the U.S. had been mostly limited to Nvidia (NVDA), which dominates the market for chips used for complex computing required for artificial intelligence programs. However, other obscure software makers with AI in their names have seen their share prices surge due to the AI frenzy. Companies like C3.ai Inc (AI) and Soundhound AI Inc (SOUN) have seen their share prices more than double this year.

Analysts said it will be a while for real winners to emerge in the AI space, with more time needed for regulatory approval and monetization of the technology.  Glenview Trust said despite Alphabet’s early stumble in rolling out an AI product, it’s far too early in the race for generative AI and the development of business models around it to declare a winner.  Deepwater Asset Management said that while Microsoft won the narrative this week, Alphabet’s longstanding investments in artificial intelligence will ultimately pay off.

• Stocks Push Higher on Strong Corporate Earnings and Lower Bond Yields
• How Should Investors Approach the Dramatic Lift in Carvana (CVNA)?
• Markets Today: Stocks Climb on Positive Earnings Results and Lower Bond Yields
• 2 Bearish Option Ideas To Consider This Thursday