NVIDIA is in the eye of the storm! "AI Battle of Faith": Wall Street repeatedly shorting, Silicon Valley resolutely burning money

Author: Huang Yu

Source: Hard AI

NVIDIA is once again caught in the center of the AI battle vortex.

The GPU leader NVIDIA experienced a roller-coaster market this week: It plummeted by 7% on Tuesday, surged by 13% on Wednesday, and then dropped nearly 7% again on Thursday. The volatility of its stock price even surpassed that of Bitcoin. Data shows that NVIDIA's 30-day implied volatility soared to 71%, while the Bitcoin DVOL index (a measure of 30-day implied volatility) dropped to 49%.

Behind the sharp fluctuations in NVIDIA's stock price is the shadow of rising costs casting over the tech giant, with growing market concerns about the returns on massive AI investments.

The bearish side represented by Wall Street investment banks and hedge funds believes that tech giants are pouring huge sums into AI but failing to generate sufficient returns. Moreover, the current application scenarios for AI are limited, making such massive investments very unwise and risky.

On the other hand, the bullish side represented by the Mag 7 and other tech giants believes that increasing capital expenditure in the AI field is necessary now, or else they will miss out on the upcoming AI era.

Money-driven Wall Street places greater emphasis on ROI

On one hand, Wall Street, which is gradually losing patience, believes that the high capital expenditure of tech giants in the AI field has not brought corresponding returns or more efficient applications. Over the past two years, only two phenomenal AI products, ChatGPT and Github Copilot, have emerged.

As early as the end of June, Goldman Sachs pointed out in a report that the development of AI technology may not progress as rapidly as expected, and its cost-effectiveness may not be as attractive as imagined.

It is predicted that in the next decade, AI can only increase U.S. productivity by 0.5%, contributing only 0.9% to GDP growth.

Barclays also stated in an August report that the frenzy of tech giants pouring money into AI is driven by "FOMO," fearing missing out on the development opportunities of AI.

Although AI technology is still in its early stages, the capital expenditure of tech giants on AI has shown a kind of irrational prosperity dominated by FOMO sentiment. As this sentiment fades, major companies will gradually reduce AI investments next year.

Analysts predict that capital expenditure in the AI field will accumulate to $167 billion from 2023 to 2026, a figure based on optimistic expectations for AI product demand.

However, in stark contrast, it is estimated that by 2026, the incremental revenue from AI cloud services will only be $20 billion.

According to media reports on Friday, top hedge fund Elliott Management on Wall Street is even more radical, pointing out that large tech giants, especially NVIDIA, are in a bubble, with the artificial intelligence technology driving their stock prices soaring being excessively hyped. Elliott believes that current artificial intelligence cannot truly work efficiently and consumes a large amount of energy:

So far, artificial intelligence has failed to achieve the promised significant increase in productivity. Apart from summarizing meeting records, generating reports, and helping computers code, there is almost no practical use.

Artificial intelligence is actually a type of software that has not yet brought value comparable to the hype.

Jim Tierney, Chief Strategist at AllianceBernstein, said, "Tech giants are increasing their bets on AI spending and creating an atmosphere of 'trust us.' However, investors are still unclear about the corresponding business models and returns. But from the perspective of total spending and return on investment, investors are not reassured."

Silicon Valley tech giants believe AI will change the future and choose to continue investing

On the other hand, tech giants who withstand pressure and remain optimistic about the future of AI continue to invest heavily.

Including Microsoft, Alphabet, Amazon, and Meta, in their latest quarterly reports, revealed a significant increase in capital expenditures in the first six months of 2024 - totaling $106 billion, with further investments planned over the next 18 months.

Alphabet, Google's parent company, saw a 90% surge in capital expenditures in the first half of 2024, reaching $25 billion.

Microsoft's capital expenditures in just the fourth quarter increased by 78% to $33 billion.

Amazon's real estate and equipment investments in the first half of this year (including e-commerce and logistics network spending) surged by 27% to $32.5 billion, with total capital expenditures expected to increase significantly by 2024.

Even though the stocks of Google, Microsoft, and Amazon were immediately sold off after the financial reports were released, the executives of these tech giants still insist on expanding investments in the field of AI.

Google CEO Sundar Pichai stated that AI products need time to mature and become more useful.

AI is costly, but the risk of underinvestment is greater. Google may have invested too much in AI infrastructure, mainly including the purchase of NVIDIA's GPUs. Even if the AI hype slows down, the data centers and computer chips purchased by the company can be used for other purposes. For us, the risk of underinvestment is far greater than the risk of overinvestment.

Amazon CFO Brian Olsavsky stated that these expenditures will mainly be used for new cloud computing infrastructure, and generative AI is now a key business for Amazon.

Meta CEO Mark Zuckerberg also stated last week that to ensure Meta maintains a leading position in the field of AI, the company has spent billions of dollars to purchase NVIDIA's GPUs to develop and train advanced AI models. Nevertheless, he also admitted that the hype around AI may lead to excessive investments.

It is better to take the risk of increasing investments early than to enter late, because the consequences of falling behind mean that you will be at a disadvantage in the most important technologies for the next 10 to 15 years. Meta's capital expenditures this year are expected to reach $40 billion Mark Zuckerberg estimates that the computing power needed to train the next generation of large language models will be "nearly 10 times" that of the previous version, while also acknowledging that Meta's AI chatbots may "take years to make money on their own".

Analysts from Dell'Oro Group predict that as much as $1 trillion may be invested in AI data centers and other infrastructure in the next five years.

What is the key to this "long and short battle" around AI?

Regardless of how Wall Street views the tech giants' continued commitment to AI, the key point of this tug-of-war ultimately focuses on: how long can the momentum of tech giants pouring money into AI last? And when will AI technology achieve greater breakthroughs in the future.

Firstly, the tech giants' ability to continue investing is supported by the relatively stable profitability of their core businesses.

For example, Meta's core business of digital advertising market share continued to grow in the second quarter, with the growth mainly coming from Facebook and Instagram, driving a 22% year-on-year increase in ad revenue, leading to a 73% year-on-year surge in Meta's net profit to $13.47 billion in the second quarter.

Zuckerberg also emphasized on the earnings call how AI is helping drive growth in the advertising business:

AI has improved recommendation features, helping people find better content and making the advertising experience more effective, these products are already at scale.

In comparison, Google's second-quarter ad revenue only grew by 11% to $64.6 billion, but its core business remains healthy enough to bear the burden of expanding expenses.

Although the tech giants have deep pockets and are willing to invest in AI, analysts at Barclays predict that by 2025 or later, major players will retreat and cut (AI) capital expenditure plans.

As technology advances, recent breakthroughs in smaller basic model areas, in the coming years, a large number of AI products and search functions will be able to move from the cloud to run locally on PCs or mobile phones. The cost of AI inference may be significantly reduced, and there may not be such a need for such large capital expenditures.

As for when AI technology will achieve greater breakthroughs in the future, it remains more of an unknown. After investing heavily in AI, only two phenomenon-level AI products, ChatGPT and Github Copilot, have been developed so far, indicating that there is still a long way to go.

Barclays predicts that by 2026, AI capital expenditure (approximately $167 billion) will be sufficient to support over 12,000 products the size of ChatGPT, with around $70 billion invested in training basic models and the remaining $95 billion used for inference.

At that time, many new AI-based services will emerge, driving positive developments in the market and industry.

However, it is certain that in the tech giants' AI competition, NVIDIA is currently the biggest winner. Due to Amazon, Google, Microsoft, and Meta's investments in AI capital expenditures, most of it has gone towards building data centers and purchasing NVIDIA's GPU products, and this momentum may continue into next year Although NVIDIA will not announce its latest quarterly financial report until the end of August, analysts generally expect NVIDIA's new quarter data center revenue to reach nearly $25 billion, equivalent to the full-year data center revenue in 2023.

It will soon be time to verify the "AI faith"