Chinese artificial intelligence (AI) company DeepSeek rocked the tech world last month when it said that its AI model was on par with top North American models despite costing a fraction of the price. It raised questions about whether spending on AI has become excessive, as many tech companies plan to spend tens of billions of dollars on building out their AI capabilities.
But the biggest concern may not necessarily be related to cost for these tech companies. The key question is whether it will pay off for them, as that's by no means a certainty. And DeepSeek's AI model may make it even easier for other companies to catch up and for competition to intensify.
Not necessarily a major competitive advantage
There are many tech companies working on next-gen AI models, and they appear to have similar capabilities (e.g., helping answer common queries, draft messages, create images, etc.). Whether you use ChatGPT, Microsoft (MSFT +1.01%)'s Copilot, Alphabet's Gemini, or another chatbot, your experience may not be drastically different from one chatbot to the next. And with the DeepSeek AI model being open source, it's easy for other tech companies to build off of it and make their own models, effectively giving them a great head start instead of having to start on their own.
Even if users prefer certain chatbots, this preference might not create a strong enough competitive advantage for the tech company behind it. And if that's not the case, then it begs the all important question of whether the spending is justifiable, especially if late comers may not be all that far behind.
The payoff from AI is still a big question mark
AI stocks have been hot buys over the past couple of years, but these are investments which can be risky as well. While investors may tolerate high spending for now, they will also expect there to be a payoff in the future. And if those AI-related investments don't result in strong sales growth down the road, that could make the stocks vulnerable to a sell-off.
Take Microsoft's Copilot for example. Salesforce CEO Marc Benioff has said that Microsoft has disappointed its customers. He compared Copilot to the "Clippy" assistant Microsoft had in the 90s and called it simply the latest iteration of Clippy.
Microsoft's sales aren't exactly taking off, and while it does offer Copilot as a subscription, it recently added its chatbot to its Microsoft 365 subscription, which includes its popular office software such as Word, Outlook, and Excel. Upon doing so, it also raised the price. That could be a sign that perhaps demand for Copilot as a stand-alone subscription wasn't significant. Packaging it along with Microsoft 365 may help increase usage of the chatbot.
NASDAQ: MSFT
Key Data Points
For a company such as Microsoft, which has been investing heavily into AI, the pressure is on to prove it has been a worthwhile endeavor. The company says its AI business is now generating revenue at an annual run rate of $13 billion, but that's fairly modest for a company which generates more than $260 billion in revenue over the course of a full year. It still has a ways to go to prove that its investments in AI will pay off. This fiscal year (which ends in June), Microsoft is spending $80 billion on AI data centers.
Investors should tread carefully with AI stocks
There's a lot of hype with AI these days, and it can be difficult to know what's the real deal and what's not. Microsoft and Alphabet can still be good long-term buys and can do well whether or not their AI strategies pay off. After all, they have boatloads of money which can allow them to experiment along the way.
In the short run, however, their stocks may experience some volatility depending on how well they are able to execute on their AI strategies and how much revenue they bring in. For other companies without strong businesses to fall back on, the risk may be even greater.
While it may be tempting to buy a stock for its AI potential, investors should also consider the risk and uncertainty involved with doing so, as this could be another tough year for tech if reality doesn't match up with expectations.
