Why Generative AI Is Spurring Investor Demand For Startups and Big Tech

Investor demand for companies perceived to be leading generative AI development are not only outpacing all other venture fields, but are significantly pushing otherwise uncertain major stock indexes.

The implication is that early investors in AI startups will see the value of their shares appreciate as scarcity stimulates already steep demand for what many believe is going to be the next big technological advance. JL 

Charley Grant reports in the Wall Street Journal:

Investors are piling into shares of big technology companies perceived to be leading in  generative AI and are pumping cash into private startups working on generative AI, reflecting “a steep increase in demand related to generative AI and large language models.” The AI app ChatGPT reached 100 million downloads in just two months, much faster than other popular apps such as TikTok and Uber. The tech-heavy Nasdaq Composite has advanced 24%, its best start to a year since 1991. “Investors are extremely interested in this space, even in light of questionable economic data and challenges in equity and fixed-income markets. There is not enough market cap to support the buying mania for AI.”

The rapid rise of generative artificial intelligence has created a frenzy on Wall Street, but investors and strategists say the rush to profit from the new technology isn’t necessarily a bubble. 

Investors are piling into shares of big technology companies—such as Nvidia NVDA 2.99%increase; green up pointing triangle, which soared 24% Thursday—that are perceived to be leading in the nascent field. They are pumping cash into private startups working on generative AI, or systems that can conjure humanlike conversation and imagery and generate computer code.

The AI app ChatGPT reached 100 million downloads in just two months, much faster than other popular apps such as TikTok and Uber. The rapid growth of the technology has caught the attention of lawmakers in Washington, who have begun a bipartisan push toward establishing new regulations.

“Investors are extremely interested in this space, even in light of questionable economic data and challenges in equity and fixed-income markets,” said David Mazza, chief strategy officer at Roundhill Investments. His firm launched an actively managed exchange-traded fund last week to bet on AI-related developments. 

That interest has led to a dramatic outperformance in big tech shares. Nvidia, which makes chips needed to power the technology, unveiled a sales and profit forecast that blew past Wall Street expectations. Thursday’s rally added nearly $200 billion to its market capitalization, putting it in striking distance of $1 trillion.

 

The strong forecast reflects “a steep increase in demand related to generative AI and large language models,” Nvidia Chief Financial Officer Colette Kress said Wednesday on a conference call with analysts.

Shares of Nvidia and Facebook parent Meta Platforms META 0.18%increase; green up pointing triangle have more than doubled this year.

Microsoft MSFT -0.50%decrease; red down pointing triangle, which in January announced a $10 billion investment in OpenAI, the startup behind ChatGPT, is up 39%. Apple AAPL 1.07%increase; green up pointing triangle, Google parent Alphabet GOOG -0.63%decrease; red down pointing triangle and Amazon.com AMZN 1.29%increase; green up pointing triangle have each added more than 35%.

The S&P 500, which is up 9.5% in 2023, would be down for the year without the contribution of the eight largest tech stocks. The tech-heavy Nasdaq Composite has advanced 24%, its best start to a year since 1991, according to Dow Jones Market Data.

Those gains are at risk if the rise of AI doesn’t lead to increased productivity in the long run, according to Andy Constan, chief executive officer of Damped Spring Advisors. “The overall economy is not rising at the gains these stock prices represent. That makes me worried for the valuations.”

Nvidia trades at 49 times its forward earnings projection, while Microsoft and Meta trade at 31 and 20 times, respectively. The S&P 500’s multiple is 18.9 times, above its 10-year average of 17.6, according to FactSet.

But some are reassured that the rally is mostly concentrated in established blue-chip stocks, rather than riskier startups without other established business lines. 

“What you’re getting with these stocks is pristine balance sheets, stable earnings growth, mostly reasonable valuations, and you have that AI kicker,” said Christopher Harvey, head of equity strategy at Wells Fargo Securities.

The market for initial public offerings has been largely dormant so far this year, continuing a trend that began in 2022. That limited supply is helping fuel the rally in blue-chip stocks, said Joseph Zappia, co-chief investment officer at LVW Advisors. 

“There simply is not enough market cap available to support the buying mania for artificial intelligence,” he said.

The push to regulate AI could keep any froth building in the sector to a dull roar. In Congressional testimony earlier this month, OpenAI founder Sam Altman warned the technology “could go quite wrong,” and fears abound that AI’s proliferation could eventually lead to lost jobs. 

 

“There is already a very critical eye in Washington. This technology hits home for a lot of constituencies,” said Nicholas Bohnsack, president of Strategas Securities.

Based on the volume of calls he has received from clients, Zappia added that interest from mom-and-pop investors hasn’t yet reached a point that suggests a bubble is developing.

“If I were to use past frenzies as a reference point, it’s nothing like people saying to me two years ago, what coins should I buy?” he said. “The crypto craze was on a whole other level.”