The artificial intelligence industry has seen strong growth in the last two years, helped by the growing popularity of platforms like ChatGPT, Claude, Google Gemini, and Perplexity AI.
AI investments are rising
As a result, companies in the industry have received substantial sums of money from venture capital and other large companies.
OpenAI, the parent company of ChatGPT, which is backed by Microsoft, is said to be about to raise more money from companies like Nvidia and Apple at a $100 billion valuation. It will be $20 billion higher than what Microsoft received when it invested $10 billion in it in 2023.
These investments will come a few months after Apple selected OpenAI as its AI provider for the upcoming devices.
If this valuation goes on, it will make it the 170th biggest company in the world, a notable achievement for a company that was started less than a decade ago. Other AI companies like X.ai, Anthropic, and Perplexity AI are now valued at over $8 billion.
Other AI companies have also received investments from large companies. Microsoft invented Mistral AI, a large AI company from France while Amazon invested in Anthropic in 2023, valuing it at over $18 billion.
Analysts believe that AI is the biggest technology in the world today because of its capabilities and its potential. For example, a company like BT, a large UK telecom firm, announced that it will lay off over 55,000 by 2030 and replace them with AI.
Many companies are also delegating some repetitive tasks to artificial intelligence solutions. A good example of this is in the restaurant industry, where a company like SoundHound is helping big players replace some of the workers with AI voice assistance.
Another example is in the call center segment, where some companies have replaced their workers with AI assistance.
Additionally, it is now possible to create applications and websites using the most advanced AI models. This means that, in the future, building large platforms will be done using AI. AI platforms are also solving complex mathematical calculations easily.
Market size is growing
Studies show that the AI industry has more room to grow in the future. One study by NMSC estimated that the AI industry was valued at $95 billion in 2021 and that it would jump to over $1.85 trillion by 2030.
Another report by GrandView Research showed that the industry was valued at $196 billion in 2023 and that it would have a compound annual Growth Rate (CAGR) of 36% by 2030.
This growth is already being seen in the corporate sector where companies in most industries are implementing AI in their operations.
Microsoft has implemented AI across most of its suite of products while Apple plans to integrate ChatGPT across its iPhones, Macbooks, watches, and other tools.
Additionally, companies in areas like media and banking are working with consultants like Accenture and Infosys to incorporate AI in their solutions. IBM is working with healthcare companies to simplify how healthcare is delivered.
The best example of how AI is growing is Nvidia, the creator of advanced GPUs that have become essential in training AI models. Nvidia made over $26 billion in annual revenues in 2021. In the last quarter, the company made over $30 billion and analysts expect that its annual revenue will be over $124 billion in 2024 and $175 billion in 2025.
Other AI companies are also seeing strong revenue growth. SoundHound’s annual revenue is expected to grow by 80% this year to $82 million followed by 84% in 2025 to over $152 million.
Palantir Technologies, which has diversified into the AI industry is expected to generate over $2.76 billion this year and $3.34 billion in 2025.
Valuation concerns remain
While the AI industry is expected to continue growing, there are concerns that companies in the industry have stretched valuations.
The benchmark S&P 500 index, whose constituents’ earnings are growing by about 10%, has a forward price-to-earnings ratio of 21.
In contrast, Palantir Technologies has a forward P/E ratio of 169 and a forward EV to EBITDA multiple of 66 while Nvidia has a P/E multiple of 43. Other companies like Broadcom, AMD, Apple, and Microsoft have substantially stretched valuations.
Therefore, there is a risk that these AI companies will reverse as the industry starts to slow. For example, in the past, stocks in some of the fastest-growing industries have retreated. At its peak, Tesla had a market cap of over $1 trillion as investors anticipated unlimited growth. Its stock has retreated by over 50% from its all-time high.
This retreat happened as more EV companies like Nio and BYD moved into the industry and started to offer equally good products, forcing it to slash prices.
There is a risk that some of the companies in the AI industry will be disrupted. For example, AMD has recently launched its AI GPUs and analysts expect that it will gain market share in the coming years.
Summary on AI
Artificial intelligence has become the best-performing technologies recently. It is seen as being a revolutionary technology, similar to how the iPhone changed the world.
In a report, analysts at Goldman Sachs estimated that the industry would disrupt all sectors of the economy. While some jobs will be replaced by AI, the report predicted that it will eventually lead to more growth and productivity.
In another report, analysts at Morgan Stanley estimated that AI is a $6 trillion opportunity. Some of the sectors that will face AI disruption are advertising, e-commercem and travel.
JPMorgan estimates that AI will boost the global GDP by between $7 trillion and $10 trillion in the next few years. Its top sectors that could benefit are legal services, insurance, and data analytics.
These estimates explain why most AI stocks have done well and beaten the S&P 500 and Nasdaq 100 indices this year.
However, there is still a risk, as Goldman’s report noted, that AI investments were getting ahead of adoption. If the industry slows, there are chances that many AI stocks will suffer a harsh reversal in the near term.
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