This appeared a day or so ago.
Is the AI bubble about to burst?
By David Swan
August 3,
2024 — 5.00am
The
artificial intelligence sector is on a precipice. Already shaping as the
defining technology of at least the last 20 years, generative AI and its frothy
company valuations are now either booming or are a bubble about to burst,
depending on who you ask.
The arms race
kicked off in earnest in November 2022 when OpenAI released ChatGPT, leading
to a scramble in Silicon Valley – and Australia – to engineer AI products and
put them into users’ hands. Tech giants and investors alike have splashed
billions of dollars into AI software companies and their suppliers, such as
chipmaker Nvidia.
Canva this
week acquired Australia’s most-hyped AI start-up, Leonardo.ai, for a reported
$320 million. Leonardo AI offers a free tool for creating AI-generated art, and
has produced more than a billion images over the past 18 months.
Yet until
this week, Australia was by all accounts getting left behind. The nation was
shaping as a relative minnow, eclipsed by the likes of the US and China, which
have moved full steam ahead in developing large language models and deploying
them to the masses.
One deal has
likely altered Australia’s trajectory in one fell swoop, however.
Canva this
week acquired Australia’s most-hyped AI start-up, Leonardo.ai,
for a reported $320 million. Leonardo AI offers a free tool for creating
AI-generated art, and has produced more than a billion images over the past 18
months.
Viewed
bullishly, the tie-up finally makes Australia relevant on the world stage when
it comes to AI, and positions a combined Canva-Leonardo.ai as a likely AI
powerhouse that could eventually rival the likes of Nvidia and even ChatGPT
maker OpenAI in terms of relevance, and valuation. Canva is currently worth
some $40 billion – a valuation rivalling that of Telstra and Qantas – and
employs thousands of Australians, most of whom are in Sydney. It’s continuing
to grow at a rapid clip even amid a tepid broader economy.
Nearly 200
million people globally use Canva’s software every month to create designs, and
adding Leonardo.ai’s customer-base of 19 million people to that mix should
instantly create a globally significant AI software maker.
The
acquisition will help Canva remain on par with AI heavyweights Microsoft and
Adobe, according to eToro market analyst Josh Gilbert.
“Every developer
is scrambling right now to integrate AI into their products and Canva is one
company that arguably needs the biggest boost here to stay ahead of Adobe and
Microsoft’s monumental AI push,” Gilbert said.
“The response
to Canva’s AI text generator ‘Magic Write’ seems underwhelming, so acquiring an
established, dedicated generative AI platform makes more sense than developing
one from scratch. It really all depends on how innovative Canva’s integration
of Leonardo’s image generation capabilities winds up being.”
Former Boston
Consulting Group strategist Barb Hyman leads one of Australia’s other most
successful AI start-ups, Sapia.ai, which has
raised $17 million from Woolworths and Macquarie and whose software is dubbed
an “AI career coach in your back pocket”.
“I love the
story of one amazing Australian tech company buying another one, there’s a
beautiful symmetry in that. I’m delighted for them,” she said.
For Hyman,
Australian AI companies shouldn’t even try to directly compete with the likes
of Google, which employs thousands of workers who have PhDs in artificial
intelligence.
“There is a
different way to be competitive ... that’s when you have a data set that is
unique. We have a proprietary data set that took us two years to build
initially,” she said.
“The ones
with the unique data are the ones who are going to see the exponential value,
rather than just trying to compete with Google or Meta using all the same
open-source data that everyone else has.”
For the local
economy and investors, there’s now much riding on the success of Canva and
Sapia.ai, as well as the degree to which other businesses can adopt AI
technologies.
Australia’s
productivity has been flat for the past decade and AI adoption will be crucial
to the growth of Australia’s healthcare and education industries in particular,
according to Dr Stephen King, who serves on Australia’s Productivity
Commission.
“AI could be
the way that the developed world gets out of its current productivity malaise,”
King said.
“AI is the
first general purpose technology likely to radically improve productivity in
service-dominated areas.
“Australia
doesn’t do a lot of inventing of new technology. Ninety-eight per cent of our
business productivity improvement comes from the adoption, not creating the new
stuff. So the big advancements that AI will make to Australian productivity
will occur through its adoption.”
Kim
Oosthuizen, head of artificial intelligence for software giant SAP, agreed and
said that it’s important for businesses to keep humans in the loop when it
comes to AI usage, to reduce error rates and “hallucinations”, the term used to
describe incorrect or misleading results generated by AI models.
“Most people
think that AI is just ChatGPT. But in a business context, people don’t realise
that these tools are here today, we’re just not aware necessarily that they’re
AI,” she said. “And I don’t think most people know or care which technology
sits in the back end, or which vendor is responsible for it, it’s more about,
is it really useful?”
That question
over usefulness is critical for US investors who are weighing AI’s potential,
and are preparing for the first interest rate cuts since 2020. Shares in Apple,
Microsoft, Google parent company Alphabet and Nvidia have all taken a hit over
the past week, leading some to question whether the AI hype train is over.
Stocks in
Nvidia have been particularly volatile, falling more than 25 per cent from
their June peaks of over $US140 ($215) a share before on Thursday bouncing back to
record the biggest daily jump in market value in Wall Street history. The
company dominates the market for the chips underpinning generative AI programs,
and is widely seen as a proxy for the heady opportunities – and what others
perceive as excessive hype – in the sector. Nvidia commands roughly 80 per cent
of the AI chip market.
Meanwhile,
infrastructure costs are skyrocketing across the board. The AI sector has
similar traits to the cryptocurrency sector, in that it relies on heavy
computing power for its calculations.
In announcing
Meta’s quarterly earnings this week, chief executive Mark Zuckerberg said the
computing resources required to train its large language model, Llama 4, would
likely be almost 10-times as much as Meta used to train Llama 3. Future models will grow beyond
that, he said.
“Meta AI is
on track to be the most used AI assistant in the world by the end of the year,”
Zuckerberg told investors and analysts on a conference call.
“At this
point, I’d rather risk building capacity before it is needed rather than too
late given the long lead times for spinning up new inference projects.”
Meta is
spending billions in a bid for AI dominance. To meet its AI needs, the company
would buy 350,000 Nvidia H100 graphics cards by the end of 2024, he said.
Google parent
company Alphabet meanwhile last week reported that capital expenditure was
$US13.2 billion in the second quarter, up 91.4 per cent from a year ago.
Microsoft this week reported capital expenditure of $US19 billion for the
quarter, up nearly 77.6 per cent from $US10.7 billion a year prior.
Not everyone
is convinced the price tag will be worth it.
Goldman
Sachs’ top stock analyst, Jim Covello, believes most generative AI technology
is not ready for prime time. He said tech giants and others were set to spend
more than $US1 trillion on AI capex in coming years, with so far little to show
for it.
“Despite its
expensive price tag, the technology is nowhere near where it needs to be in
order to be useful,” Covello said in a recent AI report.
“Overbuilding
things the world doesn’t have use for, or is not ready for, typically ends
badly.”
For Covello,
most technological transformations in history have replaced very expensive
solutions with very cheap solutions. He said that replacing jobs with extremely
expensive technology was basically the opposite of how things should be done.
“We estimate
that the Al infrastructure build-out will cost over $US1 trillion in the next
several years alone, which includes spending on data centres, utilities, and
applications,” Covello said.
“So, the
crucial question is: what $US1 trillion problem will Al solve? Replacing
low-wage jobs with tremendously costly technology is basically the polar
opposite of the prior technology transitions I’ve witnessed in my 30 years of
closely following the tech industry.”
Some analysts
see the lofty valuations as justified, however. Rhys Davis, InvestorHub chief
and co-founder, said the average value multiplier for AI companies sat at
around 25-times, in comparison to the estimated 40-times of Canva and mining
companies trading at 70-times.
“To say AI is
‘overhyped’ ignores the fact that tech and non-tech businesses are exceeding
those valuations,” he said.
“AI’s
transformative nature cannot be understated. It’s a driving force that’s
enabling companies to scale and operate at an unprecedented efficiency level,
previously thought unimaginable. Of course, what’s crucially important is the
proprietary and defensible nature of the technology ‘under the hood’.”
For Covello,
the AI bubble could take a long time to burst. In the meantime, it’s AI
infrastructure providers who will likely continue to benefit.
“While the
question of whether AI technology will ever deliver on the promise many people
are excited about today is certainly debatable,” he said.
“The less
debatable point is that AI technology is exceptionally expensive, and to
justify those costs, the technology must be able to solve complex problems,
which it isn’t designed to do.”
Here is the link:
https://www.smh.com.au/technology/is-the-ai-bubble-about-to-burst-20240731-p5jxxa.html
I really do find this a fascinating
article but have to confess I have absolutely no idea where it is all going to
land and how long it will be until we see real and sustainable profits being
booked by these companies. Given the rate of “cash-burn” they all incur it
surely won’t be long until we see the “wheat sorted from the chaff”
I give it about six months before we
are all pretty clear just who the winners and losers are. It really does, however, have the feeling of a classic hype-cycle and I am confident we will all see who the winners are soon!
How long do you think it will take?
David.
