Buzzwords have been making their way into our general lexicon for decades. Whether it's famous movie quotes or certain words or phrases, these things have a way of spreading.
Remember when everyone was talking about blockchain? How about the metaverse?
For the last few months, investors have almost undoubtedly seen the term "artificial intelligence" (AI) dominating the headlines. The primary reason for the rise in AI's popularity is the commercial release of a tool called ChatGPT, which was developed by a company called OpenAI.
Let's dig in and see what all of the hoopla is about.
Slow and steady wins the race. Right?
Alphabet (GOOG 0.20%) (GOOGL 0.39%) invested material time and capital in its own machine learning and AI capabilities. For example, the company has a conversational tool called Language Model for Dialogue Applications, or "LaMDA."
Furthermore, investors have been told about an internal AI product called Bard for quite some time. However, after years of dropping breadcrumbs, Alphabet finally gave the public a little preview of its own AI ambitions following the release of ChatGPT. The results weren't great.
Back in February, shares in Alphabet dropped nearly 14% across two trading days. During this period, Alphabet formally demonstrated Bard to the public, only to realize the AI still contains some bugs. This outcome was a bit ironic because just a few days before the public debut of Bard, Alphabet made a $300 million investment in a company called Anthropic, which is a competitor to ChatGPT.
Image source: Getty Images.
Playing chess instead of checkers
One of Alphabet's top competitors, Microsoft (MSFT 0.59%), has a completely different approach to commercial AI. Unlike Alphabet, which waited for years to debut Bard, Microsoft committed to a multibillion-dollar investment over the course of the next several years in OpenAI almost immediately following broad release of ChatGPT.
Since its investment, Microsoft has already been marketing new products. A fellow Fool contributor recently covered Microsoft's new AI art platform called DALL-E (it's a pun!) in this video. I have been a power user of DALL-E for a little while. My take is that it's entertaining and far more affordable than other artistic software available on the market. And while creating art is fun and satisfying, Microsoft has greater plans for OpenAI.
Despite the near-term cyclical headwinds the company will likely continue facing in its consumer hardware business, as well as its cloud business, Azure, Microsoft's management has a robust product roadmap and long-term vision. Most notably, Microsoft plans to integrate the technology from OpenAI into its search tools and cloud applications. This could have significant repercussions for Alphabet's search enginer, Google, while simultaneously help propel its cloud business forward and catch up to Amazon's cloud infrastructure, AWS.
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Key Data Points
What does this mean for your portfolio?
Corporations of all sizes are relying more heavily on data to make strategic decisions. AI technology is undoubtedly one of the core pillars of this digital transformation. But with that said, there are a few things going on here that investors should acknowledge.
First and foremost, in investing (and in life) it is rarely a good idea to follow the pack. What this means is that even though AI is a new, trending topic, it does not mean it's necessarily a sound investment at the moment.
Microsoft and Alphabet are two of the largest corporations in the world by market capitalization. As of the time of this article, the combined market caps of these two behemoths is $3.5 trillion. I point this out in an effort to illustrate that while both firm's respective investments in AI appear significant, a few hundred million dollars for Alphabet, or even billions in the case of Microsoft, is not a huge commitment.
Perhaps most important is that both companies are several years away from monetizing these investments to their full potential. For Alphabet, management needs to step up and figure out when its AI products, which have been mostly secret up until recently, will work properly and be commercially released.
By contrast, Microsoft now needs to execute on its vision. Layering AI capabilities into cloud applications is an enormously complex project. While Microsoft has the talent and capital to do this, the company is likely years away from full monetization.
Investors looking to acquire shares in Alphabet or Microsoft should do so. However, the underlying thesis should not be AI. Both companies have plenty of other products and growth engines for investors to analyze. While the prospects of AI are exciting, the most prudent action for long-term investors should be to listen to earnings calls and assess if management is executing on its vision, or if it sounds like AI is becoming a costly burden.
