Investors always look for the next big growth area, an innovation or trend that may transform business or our daily lives. That's because getting in on companies involved could produce mind-blowing returns. In recent years, investors identified artificial intelligence (AI) as the next major thing -- and they piled into shares of companies driving this technology.
Names such as AI chip designer Nvidia, cloud player Alphabet, and networking expert Broadcom soared, leading the S&P 500 to record levels and significant gains. The benchmark advanced nearly 80% over the past three calendar years.
But, in recent months, AI stocks have lost momentum. This is due to a variety of concerns. Back in November, with valuations at a peak, investors worried that an AI bubble could be just ahead. They also worried about the fast pace of AI spending and whether the revenue opportunity would make companies' AI investments worthwhile. Then, in recent weeks, concerns about the war in Iran as well as economic growth in the U.S. added to the uncertainty.
As a result, the S&P 500 has delivered ups and downs, depending on the news of the day -- and AI stocks have struggled. So now is the perfect time to consider the following question: Was AI just the biggest hype cycle of this generation? Here's what the numbers actually say.
Image source: Getty Images.
Elements of a hype cycle
So, first, let's take a look at the elements of a hype cycle. Gartner analyst Jackie Fenn first spoke of such a cycle back in the 1990s, breaking it down into four phases: an innovation trigger, peak of inflated expectations, trough of disillusionment, slope of enlightenment, and plateau of productivity.
The idea is that new technologies may go through these stages, and understanding the stages may help you make investing decisions. For example, a very cautious investor probably shouldn't invest during the earliest stage, when it isn't yet clear if the innovation will actually take off and lead companies to revenue growth.
Now, let's consider where AI fits in. The company has moved well beyond the "innovation trigger," as AI today is being used in a variety of situations -- from gaining efficiency in factory operations, for example, to voice AI taking orders at a restaurant. Though some investors have questioned, as mentioned above, whether AI-driven growth will meet expectations, so far, evidence doesn't support this concern.
AI at work
The numbers actually say otherwise. Here are a couple of examples. Amazon's (AMZN +1.36%) Amazon Web Services (AWS), the world's biggest cloud service provider, has seen revenue soar as customers rush to apply AI to their businesses. AWS recently reached a $142 billion annual revenue run rate thanks to this demand. Amazon also is a user of AI, applying it in several ways, such as through shopping assistants for customers and within its fulfillment centers to gain efficiency. The company has spoken of how this is driving results -- customers using shopping assistant Rufus are 60% more likely to buy, Amazon said recently.
NASDAQ: AMZN
Key Data Points
Palantir Technologies (PLTR +1.36%) is another example of successful AI use. The company, which sells an AI-driven platform that helps customers better analyze and use their data, said it's seeing "faster and larger" contract expansions from existing customers. For example, a utility company increased its annual contract value from $7 million in the first quarter of last year to $31 million by the end of the year, and an energy company boosted its contract from $4 million to $20 million. They are doing this because Palantir's AI platform is delivering results.
So AI isn't falling short of users' expectations, suggesting that this technology can indeed live up to what it initially promised. Meanwhile, demand for AI products and services continues to soar, according to chip designers and cloud service providers. And to support this demand, some of the biggest tech companies aim to invest nearly $700 billion this year.
Of course, certain companies or uses of the technology may disappoint now or in the future. But AI, overall, hasn't proven to be the biggest hype cycle of this generation. Instead, the numbers show it is delivering on promises, making quality AI stocks a great long-term investment.
