- Many companies are suggesting that AI will generate big benefits.
- The technology popularized by ChatGPT has attracted billions of dollars in investment as a result.
- But it’s still not clear whether AI can generate benefits that live up to the hype.
Just as gold was discovered in the foothills of California in the 19th century, artificial intelligence is sparking its own boom in the 21st century, with no shortage of modern prospectors promising riches.
Mustafa Suleiman, co-founder of companies including DeepMind and Infection AI and now head of Microsoft's AI division, said in a study last year that generative AI “is expected to grow explosively, exceeding $1 trillion in revenue by 2032.” That figure was up from $40 billion in 2022.
Expectations that the AI boom will generate huge profits are sky-high, which explains why the enthusiasm for the technology is still going full speed ahead. The problem is, it's not at all clear where the return on investment will come from.
New questions about when or whether technology companies can justify high capital expenditures and sky-high valuations for AI emerged this week as several companies offered new perspectives on how AI technology can benefit their businesses.
Returns and hype
Google reported its second-quarter results on Tuesday, showing signs that its AI investments have yet to make a big impact.
While the company's revenue rose to $84.7 billion in the April-June quarter from $74.6 billion in the same period last year, executives including Sundar Pichai and Philip Schindler struggled to provide investors with details about how AI was contributing to the financials.
As my colleague Catherine Tangarakis Lippert pointed out, investor questions about click-through rates and monetization of the “AI Summary” feature designed to summarize Google search results (the same feature that recommended adding glue to pizza) have been met with fairly vague answers.
“We started conservatively by expanding to more countries and focusing on quality and making sure the metrics are healthy, but we'll expand the use cases going forward,” Pichai said.
That was likely painful news for investors, given how AI has been driving spending at Google: The company's fourth-quarter capital expenditures nearly doubled from a year ago to $13 billion as it poured money into the chips and computing technologies needed to run AI.
Stock prices fall
Google's CEO had a different way of addressing concerns: Pichai said Alphabet is “in the early stages of a very transformative era,” so “the risks of underinvesting are significantly higher than the risks of overinvesting.”
Investors aren't so convinced. Alphabet shares fell 5% on Wednesday amid a broader tech selloff in a market driven by this year's overwhelming enthusiasm for AI. Tesla Inc.'s earnings this week also weighed on tech stocks' performance, reporting a drop in net profit.
Similar questions about the gap between returns and hype have arisen in the startup world this week.
While investors are typically giving young companies more time and leniency, it’s clear that many AI startups are commanding valuations far in excess of the profits they’re making, with no guarantee that those profits will scale sufficiently in the future.
On Wednesday, The Information reported that OpenAI could lose as much as $5 billion this year, based on a cost analysis that includes the costs of running and training the massive language models behind the company's AI.
This will be tough for the maker of ChatGPT, which has raised billions from Microsoft and is valued at around $80 billion.
Cohere, a Toronto-based AI startup founded by ex-Googlers in 2019, announced a new funding round of $500 million on Monday, valuing it at about $5.5 billion, making it one of the most highly valued AI startups in the world.
This makes the startup valued at a lot more than it makes. Cohere, which provides large-scale language modeling (LLM) applications for the enterprise, hit $35 million in annualized revenue in March, according to BI.
In some ways, this is a positive sign for Cohere, which sees its annual revenue triple between the end of 2023 and the end of Q1 2024. It's also reasonable to assume that revenue will continue to grow beyond that point.
Still, assuming it continues to grow at the same pace it has since the beginning of the year, the $5.5 billion valuation it secured this week still significantly exceeds the money the company is generating.
The company also laid off about 20 employees after raising salaries, Fortune reported.
In a statement about the cuts, a representative for Cohere told Business Insider, “Our latest funding round allows us to have a clear vision for Cohere's future, which necessitates some internal restructuring.”
“We continue to hire aggressively to provide businesses with the most accurate, secure and private multilingual AI solutions on the market.”
On Tuesday, another startup, Harvey, announced a $100 million funding round led by Alphabet's venture capital arm, Google Ventures, which now values the company at $1.5 billion.
High expectations
Winston Weinberg and Gabriel Pereira, who founded Harvey as a startup to provide generative AI services to the legal sector, said in a blog post that the company's annual recurring revenue has also tripled since its last round of funding in December.
That figure was around $10 million at the time, The Information previously reported, meaning annual recurring revenue would be around $30 million today, a 30x valuation that highlights just how high expectations are for Harvey.
It remains to be seen whether these companies can generate enough profits to live up to the hype that surrounds them: Last year, veteran venture capitalist Vinod Khosla suggested that most startups are overvalued and that most investments in AI “will lose money.”
Those putting their money into AI can only hope he's wrong.
