Recent stock market jitters suggest a tech market correction may be starting in artificial intelligence (AI) where more than $42.5bn was invested in 2,500 equity rounds last year alone.
A rude awakening on the stock markets this week showed that even the loftiest of tech giants are not invulnerable as declines in shares in Nvidia, Apple and Microsoft demonstrated investors are possibly getting cold feet.
Lawrence Vesey from Sia Partners has warned this week that inflated valuations around AI could unleash havoc.
“Beyond the chipmakers creating AI hardware, it’s still uncertain how AI will ultimately impact companies’ financial performance”
According to a CB Insights report earlier this year, generative AI remains one clear bright spot in the erstwhile sombre environment of venture capital. In 2023 AI start-ups raised $42.5bn across 2,500 equity rounds. Although down 10% year-over-year, AI funding fell far less than broader venture funding which was down 42% in 2023. AI deal volumes were up 24% year-on-year, seeing less of a decline seen in venture as a whole (-30%). The 2,500 deals marked the lowest annual deal count in AI since 2017.
Can AI drive profitability?
Lawrence Vesey, Sia Partners
Generative AI (GenAI) exploded in relevance in 2022 with the public unveiling of OpenAI’s ChatGPT, sparking a renaissance in tech optimism in the tawdry aftermath of the productivity boom caused by the Covid-19 global lockdown.
But now Vesey suggests concerns about when investors will see a return on their investment could dampen ardour towards GenAI.
“The current AI-driven boom stands in stark contrast to the dot-com bubble of the late 1990s. Today’s leading beneficiaries are profitable and well-established tech giants with a history of surviving various economic challenges. Unlike the late 1990s, when many rapidly growing companies attracted substantial investments despite lacking profitability, the current scenario is very different.
“However, it’s likely that an AI bubble exists, with some publicly traded companies showing inflated valuations. Beyond the chipmakers creating AI hardware, it’s still uncertain how AI will ultimately impact companies’ financial performance.”
Vesey spearheads the Business & Digital Transformation and Public Sector Practice at Sia Partners across Ireland and the UK, bringing a wealth of experience in orchestrating substantial business and technology transformation initiatives across diverse industries.
What goes up …
According to Vesey a medium-term challenge will be generating a return on the massive investment that is going into AI.
“The sums currently being invested are remarkable, but many investments are being done on that basis that this is ‘a cost of staying relevant’ – and to avoid a situation that companies like Intel are in where they have lost their leading positions as chipmakers. Not all organisations are going to sustain this rate of investment, and at some point, investors will look to better understand what the actual return will be.”
Worryingly, Vesey believes a broader tech market correction is happening.
“A market correction may be starting, as evidenced by recent declines in Nvidia and Microsoft shares. As valuations rise, there is increasing pressure on these companies to provide solid proof that their substantial investments are delivering tangible benefits.
“All of the market uncertainty is being increased by the current US elections and the risk of greater trade barriers between the US and other countries, particularly China,” Vesey warned.
-
Bank of Ireland is welcoming new customers every day – funding investments, working capital and expansions across multiple sectors. To learn more, click here
-
Listen to the ThinkBusiness Podcast for business insights and inspiration. All episodes are here. You can also listen to the Podcast on:
-
Spotify
-
SoundCloud
-
Apple
