The excitement around artificial intelligence (AI) lit a fire under growth stocks last year. Businesses involved with AI were among the hottest buys in tech in 2023. Although there have been safety and privacy concerns related to ChatGPT and other AI chatbots, investors have generally been fairly bullish on AI stocks.
But are the expectations realistic? OpenAI CEO Sam Altman doesn't think so.
"People are begging to be disappointed"
Altman is the face and name behind OpenAI and ChatGPT, and would have every incentive to hype up the company and its chatbot as much as possible. But even he is growing concerned that the bar may be getting set too high for what AI can do.
At the World Economic Forum in Davos, Switzerland, he downplayed the long-term impact of AI. "It will change the world much less than we all think and it will change jobs much less than we all think."
According to a recent study from the International Monetary Fund, AI may impact as many as 40% of all jobs in the world. And that percentage rises to 60% when it comes to advanced economies. That doesn't mean it will have a negative effect, however, as the report states that in half of those situations it will enhance productivity. But in other cases it could wipe out the need for jobs entirely.
Altman is skeptical about those types of forecasts and believes that the bar is being set so high that "people are begging to be disappointed, and they will be." And if the public is disappointed, investors will surely be let down as well.
Many stocks have risen in anticipation of soaring AI demand
Three stocks can help me underscore the extreme bullishness in AI over the past year: Microsoft (MSFT 1.82%), Palantir Technologies (PLTR 3.73%), and C3.ai (AI 3.02%).
In Microsoft's case, the stock surged 57% in 2023. That's a big return for a company that was already one of the largest in the world. Today, at around $3 trillion, it's trading at 39 times its trailing earnings. I'm looking at a fairly high multiple for a company whose revenue totaled $212 billion last fiscal year (ending on June 30, 2023) and rose by a relatively modest 7% year over year. There's excitement around its AI-powered Copilot, which will enhance the company's Office products, but investors may be paying for a lot of future growth right now, and that could take a while to pay off.
Palantir Technologies' stock isn't as large as Microsoft's but its share price soared a monstrous 167% last year. The company launched an AI platform, and it says it has seen a huge uptick in demand for companies looking to learn how AI-powered data analytics can transform their businesses. The company hasn't seen its growth rate take off just yet -- it was 17% for the period ending Sept. 30, 2023, which is comparable to recent quarters -- but investors appear to be anticipating that it will.
C3.ai provides businesses with actionable AI analysis of business data, and it should have been an obvious winner in the recent emergence of AI. Last year its shares popped 157%. And that would have been even higher if not for the latter half of the year, when the stock began to give back some gains as investors became unimpressed with the company's performance. For the past three quarters, revenue has been between $72 million and $74 million, showing little to no quarter-over-quarter growth to suggest AI has been resulting in a strong uptick in demand for C3.ai's products and services.
Investors should temper their expectations
There's a lot of long-term potential for AI, but investors need to be careful not to expect too much, too soon. Remember, it was only a few years ago that the hype was around the metaverse and how transformative that would be. While AI has much more potential and more ways it can improve businesses, it's important not to forget the dangers of getting caught up in believing expectations that may be overly optimistic.
For investors, it's important to focus on items with less ambiguity and more certainty. This means looking at the actual financials, where the business stands today, and whether the growth it was forecasting actually comes to fruition. If you're paying a steep premium for a stock that depends on a lot of future growth, you should be fairly confident that growth is truly attainable. Otherwise, you could be disappointed.
AI stocks have tremendous potential, but investors should be careful not to make castles in the air. The takeaway from Sam Altman's warning is clear: In the AI gold rush, smart investors will dig for facts, not just follow the hype.
