Many companies in the tech sector were in the red this week, and I believe it's because momentum traders saw the narrative around AI slowing down.
Company | Week Price Change | Month Price Change |
NVIDIA | -6.1% | -8.8% |
AMD | -9.4% | -12.2% |
Intel | -5.9% | +2.5% |
ARM | -10% | -10.8% |
-7.5% | -9.7% | |
TSMC | -2.7% | -2.6% |
Qualcomm | -5.6% | -7.7% |
Microsoft | -3.7% | -6.1% |
Meta | -4.2% | -10.4% |
People are still impressed with the technology, but the reality is sinking in that it will take time before companies make serious money from AI. Google's earnings call this week highlighted this reality.
When Google's CEO, Sundar Pichai, was asked by an analyst about the return Google expected from their AI investments, Sundar did not respond with a clear return figure. Instead, he said the risk of underinvesting in the technology is too high, and he needs to keep spending. I understand Sundar's position because companies like Meta, Amazon, OpenAI, and Microsoft are investing heavily in AI, so Google cannot risk being left behind. Especially since they were caught flat footed when OpenAI came out with ChatGPT, and Google had to rush to put their model out.
Although I cannot blame Sundar for joining the AI arms race, he is on a slippery slope. The more these companies spend to compete against each other in the AI space, the harder it will be for them to generate good returns on their investments. Their massive spending will increase the price they pay for equipment, land, energy, and acquisitions. As these costs increase, companies will need higher profits to justify their spending.
Sundar's reluctance to give a clear answer on expected returns made investors realize that Google is not making real money from AI right now. Also, when the analyst asked about Google saving money by using AI, Sundar said his engineers can't use AI to write high quality code. So right now, Google is not saving or making money from AI.
When I say make money from AI, I'm talking about high nine to low ten figure money. When companies are Google's size, they need massive numbers to move the needle.
Market Needs To See Returns Soon
I wonder how the market will react if a few more quarters go by and companies still can't make money from AI. CEOs might experience the same pressure Mark Zuckerberg faced when he wanted to spend more money on the metaverse, but investors revolted against his strategy, and the stock dropped by ~70%. Zuckerberg had to do a 180 and curtail spending on his beloved metaverse.
If investors start dumping Google, Meta, Amazon, and Microsoft shares because they don't see a clear path to outsized returns, companies will be forced to slow down their AI spending. No matter what CEOs say, I don't see them spending money in the face of an investor revolt.
Deceptive Accounting
Right now, the market is somewhat careless, and companies can get away with selling dreams. But soon the dreams will need to become a reality if companies want the market to keep bidding up their shares.
I believe the market is careless because it doesn't seem to care about the dubious and unscrupulous accounting practices companies are using. Yesterday I read an article about CrowdStrike's shady accounting, where they use a non-GAAP metric called "Annualized Recurring Revenue" (ARR) to book revenue even when contracts with their customers have expired. Also, if an existing contract is about to expire, CrowdStrike assumes the contract will be renewed, and they book the revenue. In their last fiscal year, CrowdStrike's ARR was $3.44 billion, but their actual revenue was $3.06 billion.
According to the WSJ article, the executives at CrowdStrike also received bonuses because of this imaginary metric. They pretty much stole shareholders' money, and no one blinked an eye. I call it stealing because no reasonable person would think CrowdStrike's version of ARR is a reasonable metric. For executives to use it to boost their compensation is a crime. Also, for investors to ignore CrowdStrike's use of ARR, shows me that the market is in the clouds right now.
I also see companies extending the depreciation life of their equipment without any pushback. These extensions reduce companies depreciation expense and increase their profits. I still haven't heard a good reason why these companies need to extend the life of their equipment except to inflate their profits.
In today's market, companies are using different ways to juice their numbers, and nobody cares. This is a dangerous market. I'm just waiting for the ice cube to melt.
Stay strong, stay blessed, and God willing, I will see you next week.
Only simpletons believe everything they’re told! The prudent carefully consider their steps.
Proverbs 14:15 NLT
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