Last year, as the Federal Reserve began an aggressive cycle of rate hikes, Silicon Valley responded by initiating significant layoffs and reducing project numbers in order to cut costs. This turmoil saw the NASDAQ Composite Index plummet by around 30% and the U.S. primary market, dominated for years by tech start-ups, came to a standstill. This led many to believe that the U.S. tech sector might be facing a crisis similar to the 2000 internet bubble, and that a long-term slump might be inevitable.
However, at the end of last year, attention turned to ChatGPT and AI technology, which quickly became buzzwords on Wall Street and in Silicon Valley. The American tech industry swiftly latched onto this potential lifesaver, improving the stock prices and growth prospects of many tech giants and bringing a number of start-ups into the spotlight.
From tech giants and start-ups to Bay Area real estate, AI has saved the American tech industry. So far this year, the NASDAQ Composite Index has risen by 32%, significantly outperforming the Dow Jones Industrial Average's increase of 3.4%. Particularly notable within the NASDAQ have been the stocks associated with AI, with Microsoft's stock price increasing by 41% and NVIDIA, an AI chip provider, almost doubling.
Microsoft, which has invested billions of dollars in OpenAI, has positioned itself as a pioneer in AI technology, incorporating it into everything from Bing's search engine to workplace software. Google, a long-time leader in this field, has launched numerous search features based on generative AI.
Microsoft CFO Amy Hood said she was optimistic about the returns from artificial intelligence. She emphasized the positive early feedback and demand for the AI capabilities the company has thus far acquired. Microsoft will continue to invest in cloud infrastructure, especially expenditures related to AI, in anticipation of continued customer-driven growth and an increase in revenue over time.
Google CEO Sundar Pichai stated that for Google, everything starts with innovation and improvement of search, and ensuring they stay ahead in that regard.
Many other companies have also jumped on the AI bandwagon, fearing they might be left behind. In the past few years, investors expected to hear about cost-cutting, layoffs, and responses to high inflation during earnings calls. But now, they're more interested in hearing executives' thoughts on getting on board with AI. Indeed, listed American companies are following suit. Data from FactSet shows that out of the S&P 500 companies that held earnings conference calls from mid-March to late May, 110 mentioned artificial intelligence. This number sets a new record and is about three times the average for the past decade.
Over the past year, many companies have faced pressure from investors to increase their profits, leading to a wave of layoffs. During this layoff wave, a number of top talents have left these companies. This has provided an opportunity for AI start-ups founded recently to poach talent. Investors believe that, at a time when the overall U.S. economy is still sluggish, new start-ups could be more efficient than the previous generation of companies because they require less initial investment in infrastructure and can do excellent work with smaller teams. Some even predict that with AI automating many jobs, companies can maintain a smaller scale and become profitable more quickly.
Wall Street is also shifting from worry to excitement due to the burgeoning development of AI technology. SoftBank Group CEO Masayoshi Son said last month that he plans to end a period of calm investing and focus on AI, after the ChatGPT chatbot rekindled his excitement for the future. Son added that the time has come for them to go on the offensive, and he hopes SoftBank can lead the AI revolution.
AI companies have even brought some buoyancy to the sluggish San Francisco real estate market, particularly the commercial sector. Following the pandemic, some Bay Area communities previously favored by tech companies are showing signs of revitalization.
But what challenges might the AI wave encounter?
AI is not a panacea, and after the hype subsides, some start-ups will inevitably bow out. Some analysts suggest that some start-ups that managed to raise funds during the financing boom could go bankrupt. For companies needing capital but unable to turn a profit, a "massive predicament" could still loom. Beyond the potential difficulties in securing financing, these AI start-ups also face the challenge of data scarcity.
Analysts pointed out that many companies might be seeking top-notch AI applications, but they cannot access the data needed to build powerful apps, let alone proprietary data that could help them.
In other words, when AI models in the market become commodities that can be purchased, the real value lies in the data. Having the right, large amount of data is possibly more important now than ever before.
More crucially, obtaining this data in a legal and sustainable manner is paramount. Recently, OpenAI, the developer of ChatGPT, found itself embroiled in two lawsuits within a week - one related to data privacy and the other to copyright.
Despite the foreseeable difficulties, the market's outlook on the tech industry is more optimistic than it was a few months ago. An analyst commented that without the boom in AI, the situation would look more like a winter. AI has, to some extent, saved Silicon Valley's innovation, otherwise the valley's slump would last longer and sink deeper.
