There could be signs of trouble looming ahead for the markets. While the economy is still doing relatively well and tech companies are reporting strong numbers, the danger is that in the not-too-distant future, there could be some weakness. And I'm not referring to just the possibility of a recession.
Spending on artificial intelligence (AI) has helped many tech companies achieve considerable growth in recent quarters, and it has given their valuations a boost. But a slowdown in AI spending could also be what causes them to decline in the near future.
Are companies spending too aggressively on AI?
AI presents a hot new growth opportunity for many tech companies, and some are spending feverishly for the sake of not being caught behind the latest trend. Some big tech CEOs have recently hinted that may indeed be the case.
In a recent interview with Bloomberg, Meta Platforms (META 1.06%) CEO Mark Zuckerberg admitted that, "there's a meaningful chance that a lot of the companies are overbuilding now and that you look back and you're like, oh, we maybe all spent some number of billions of dollars more than we had to." Meta is definitely benefiting from the excitement, integrating its own AI into its social media apps and Ray-Ban smart glasses. And through the first six months of the year, the company's revenue has grown by 25% to $75.5 billion.
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Alphabet (GOOG 0.84%)(GOOGL 0.73%) CEO Sundar Pichai also said, during the company's July 23 conference call with analysts, that "when we go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here." Alphabet has been investing heavily into AI all across its businesses, including into its Gemini chatbot as it looks to rival the success of OpenAI's ChatGPT. Alphabet, like Meta, has also been seeing an uptick in demand this year due to a stronger ad market and resilient economic conditions, Its revenue through the first six months of 2024 has totaled $165.3 billion -- a 14% increase from the same period last year.
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But the good top-line results shouldn't make investors overlook these leaders' warnings with respect to AI spending, as they corroborate data from research company Gartner, which estimates that at least 30% of generative AI projects may end up being abandoned by the end of next year, suggesting that companies are indeed spending far too heavily on AI.
A slowdown in spending may be inevitable
It has been off to the races for companies to develop AI models and their own chatbots for their websites. But as the time comes to quantify and justify whether those projects were truly worthwhile, it may result in a reduction in spending, which would be bad news for the markets.
And if companies scramble to reduce their AI expenses, that could trickle over into less spending on other areas, including advertising and any tech-related expenditures. For Alphabet, Meta Platforms, and other growth stocks, that could mean a slowdown in their growth rates, even if they aren't making next-gen AI chips.
Is a big correction coming for AI stocks?
Many investors justify paying significant multiples for AI stocks these days because of their promising growth prospects. But the risk is that those expectations may not match up to reality, at least, not in the near term, anyway. AI can disrupt some jobs and take over others, but that doesn't mean that every investment into AI will be a worthwhile one.
Investors shouldn't ignore these recent warnings from Zuckerberg and Pichai, as there may be a reduction in AI and tech-related spending in the months ahead, which could result in more bearish conditions for highly priced AI stocks. While that doesn't necessarily make all AI stocks bad buys today, investors should be wary of those trading at egregious earnings multiples. And with a recession possibly coming soon as well, there may be more of a reason than ever for investors to temper their expectations for tech stocks as a whole, as their returns could be limited in the near term.
