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The rise of artificial intelligence has become a key theme in recent earnings results, especially in the tech sector. Joseph Bonner, Senior Communications & Technology Analyst at Argus Research, looks at why it’s important to remember that AI is still in the early stages of development.
Print Transcript
[AUDIO LOGO]
It's become one of the big drivers out there in the market, especially in the tech sector. Of course, we're talking about artificial intelligence. But can that momentum last? While the AI trade remains front and center for many investors, there's also been concerns raised about a potential AI bubble.
Let's get some perspective now. Joe Bonner, Senior Communications and Technology Analyst at Argus Research, joins us. Joe, it's great to have you back on the show. I was going to say it's great to have you on the show for the first time. Welcome.
Good morning. Thank you.
All right, let's get into the AI, some of the trends you're seeing out there. I mean, the metaverse was a big one for a while, then AI sort of knocked it to the side a little. Are all these big ideas living up to the hype?
Well, OK, so we're definitely at the top of the hype cycle. I thought 2020, last year was top of the hype cycle, but we're definitely gotten more momentum. When you think back a little bit-- I mean, cloud computing, that went through a hype cycle, and before that was the iPhone and the smartphone, and before that it was the internet itself. So we've been through this before.
You've got a promising new technology. It promises to make things more efficient, cheaper, better. Every company wants to build on it. Every company wants to develop it, sell it, buy it. But you have to think, we're in the beginning stages here, OK? This is software technology. It goes through an iterative process every six to nine months. You've got ChatGPT 4.0 or Gemini 2.5. Every six to nine months, it's going to get better and better and better. So right now, it's just at the beginning stages-- lots of hype but maybe some hiccups along the way. But it's going to get better and better. And it will come to some use at some point. [LAUGHS]
That's what I wanted to ask you about because we're talking about the early innings here. And you say the technology will grow more powerful. It will get better. But at some point, people want to be able to put it in their pocket or put it on the computer in front of them, like sort of that killer app that really hasn't arrived yet.
Yeah. I mean, you got to realize-- again, we're at the beginning. It makes mistakes. You have a technology that makes mistakes. So there's a job one there. Another thing you have to think about is the safety issue-- deepfakes, things like AI-generated content. How are you going to know what's AI-generated versus what's not AI-generated? It's got to be something more than just an intelligent chatbot. So like you say, the killer app, something that you can put in your pocket and that will really make a difference. We're not there yet.
Up to this point, the play has been the chipmakers, right, because you can see a clear line where you say, OK, artificial intelligence needs computing power. Who's got the chips for it? There's been clear winners. This next phase seems like it's going to be a little bit tougher to choose. Is it a Google? Is it a Microsoft? Is there some other company we haven't even thought of yet?
Obviously, there's a lot of startups around the space, a lot of capital going into the space. And you're right. Nvidia is the one with the chips. They're the one right now. Also, think about Microsoft. Microsoft made an investment in OpenAI back in 2019. That's either really lucky or really farsighted, depending on how you look at it. That is one corner of the AI market. And you can see Microsoft AI is already contributing to their revenue, that cloud revenue.
So right now, it's the big guys that have it. But like I say, there's lots of capital going into upstarts. And it's going to be a very active space for a while.
Before we move on, we haven't really mentioned the metaverse. I mean, there was a big company that actually changed its name based on the fact that they thought the metaverse was the next big thing. How is that story unfolding?
OK, I'm going to give my opinion here. The metaverse has been a flop. It's been a flop. You got to go back to when CEO Mark Zuckerberg changed the name and said he's pivoting the company. He said the end of the decade-- we're in 2024 now, so we got a few years.
But the market wants everything now. It's impatient. And all it sees is the capital expenditure going out, the costs going into it, and hasn't seen the returns. So again, it's not there. Simple.
Let's talk about some of the other areas that you focus on, including enterprise software. We've been seeing some growth, but the forecasts haven't been great. What's happening in that space?
Yeah, there's been a lot of warnings-- not really warnings on earnings or anything like that but a lot of talk about contract, about the macro environment and contract extension, contracts taking longer to get done and a lot of customer resistance, budget resistance. But then when you see the numbers, you see, again, a company like Microsoft, cloud computing up 31% in the first quarter, a smaller company like ServiceNow, cloud computing in the mid-20s. So it seems like there's a lot of concern, but the deals are still getting done. So you want to take that concern as real. But also, you look at those numbers, and a lot of companies would kill for that kind of revenue growth.
What do you think about the space going forward? I mean, obviously, will these two sort of factors start to get a little closer in terms of what is the perception and what is the reality?
I think yes. I'm not an economist, but when you look at the macro, we're not in a bad place. And again, you got to look at their forecasts, look at the ones raising forecasts. And I'm definitely positive despite all the concern.
Now, another part of your coverage universe includes the media sector. I spent 25 years in traditional media before I took on this role. So I have lived some of the downturn, to put it nicely. What is going on out there?
So you think about media. You've got all the traditional media companies. Streaming came along. Everybody had to try to compete with Netflix. So they all started their own streaming services, investing gobs of money, and rolling out these services, producing more content, taking content back that they got money for licensing and taking it back in so they could try to build up these streaming services. And it didn't work, OK?
So it was all about subscriber, subscriber, subscriber. Now, it's all about profitability, profitability, profitability. Everyone has turned to looking for a profitable streaming service. So the market did not like going after the subscribers. The market likes profitability more. But the questions around these streaming services, these subscale streaming services-- I mean, bundling, we used to talk about the cable bundle, all the cable channels. Now, we're going to rebundling. You have these services getting together and rebundling into packages. You got a new sports service that's coming in later this year. You have other companies bundling their streaming services. They've got to do this in order to compete, to gain scale.
So I think the focus on profitability is a good thing. But there's a question mark about, are these subscale services really going to survive? You think about all the news around Paramount, Paramount+. Was it for sale? Is it not for sale? Is it on the market? Is it off the market? That's kind of the bubble one right there. Other ones, you got to wonder-- are they going to have to come together at some point? [AUDIO LOGO]
[MUSIC PLAYING]
It's become one of the big drivers out there in the market, especially in the tech sector. Of course, we're talking about artificial intelligence. But can that momentum last? While the AI trade remains front and center for many investors, there's also been concerns raised about a potential AI bubble.
Let's get some perspective now. Joe Bonner, Senior Communications and Technology Analyst at Argus Research, joins us. Joe, it's great to have you back on the show. I was going to say it's great to have you on the show for the first time. Welcome.
Good morning. Thank you.
All right, let's get into the AI, some of the trends you're seeing out there. I mean, the metaverse was a big one for a while, then AI sort of knocked it to the side a little. Are all these big ideas living up to the hype?
Well, OK, so we're definitely at the top of the hype cycle. I thought 2020, last year was top of the hype cycle, but we're definitely gotten more momentum. When you think back a little bit-- I mean, cloud computing, that went through a hype cycle, and before that was the iPhone and the smartphone, and before that it was the internet itself. So we've been through this before.
You've got a promising new technology. It promises to make things more efficient, cheaper, better. Every company wants to build on it. Every company wants to develop it, sell it, buy it. But you have to think, we're in the beginning stages here, OK? This is software technology. It goes through an iterative process every six to nine months. You've got ChatGPT 4.0 or Gemini 2.5. Every six to nine months, it's going to get better and better and better. So right now, it's just at the beginning stages-- lots of hype but maybe some hiccups along the way. But it's going to get better and better. And it will come to some use at some point. [LAUGHS]
That's what I wanted to ask you about because we're talking about the early innings here. And you say the technology will grow more powerful. It will get better. But at some point, people want to be able to put it in their pocket or put it on the computer in front of them, like sort of that killer app that really hasn't arrived yet.
Yeah. I mean, you got to realize-- again, we're at the beginning. It makes mistakes. You have a technology that makes mistakes. So there's a job one there. Another thing you have to think about is the safety issue-- deepfakes, things like AI-generated content. How are you going to know what's AI-generated versus what's not AI-generated? It's got to be something more than just an intelligent chatbot. So like you say, the killer app, something that you can put in your pocket and that will really make a difference. We're not there yet.
Up to this point, the play has been the chipmakers, right, because you can see a clear line where you say, OK, artificial intelligence needs computing power. Who's got the chips for it? There's been clear winners. This next phase seems like it's going to be a little bit tougher to choose. Is it a Google? Is it a Microsoft? Is there some other company we haven't even thought of yet?
Obviously, there's a lot of startups around the space, a lot of capital going into the space. And you're right. Nvidia is the one with the chips. They're the one right now. Also, think about Microsoft. Microsoft made an investment in OpenAI back in 2019. That's either really lucky or really farsighted, depending on how you look at it. That is one corner of the AI market. And you can see Microsoft AI is already contributing to their revenue, that cloud revenue.
So right now, it's the big guys that have it. But like I say, there's lots of capital going into upstarts. And it's going to be a very active space for a while.
Before we move on, we haven't really mentioned the metaverse. I mean, there was a big company that actually changed its name based on the fact that they thought the metaverse was the next big thing. How is that story unfolding?
OK, I'm going to give my opinion here. The metaverse has been a flop. It's been a flop. You got to go back to when CEO Mark Zuckerberg changed the name and said he's pivoting the company. He said the end of the decade-- we're in 2024 now, so we got a few years.
But the market wants everything now. It's impatient. And all it sees is the capital expenditure going out, the costs going into it, and hasn't seen the returns. So again, it's not there. Simple.
Let's talk about some of the other areas that you focus on, including enterprise software. We've been seeing some growth, but the forecasts haven't been great. What's happening in that space?
Yeah, there's been a lot of warnings-- not really warnings on earnings or anything like that but a lot of talk about contract, about the macro environment and contract extension, contracts taking longer to get done and a lot of customer resistance, budget resistance. But then when you see the numbers, you see, again, a company like Microsoft, cloud computing up 31% in the first quarter, a smaller company like ServiceNow, cloud computing in the mid-20s. So it seems like there's a lot of concern, but the deals are still getting done. So you want to take that concern as real. But also, you look at those numbers, and a lot of companies would kill for that kind of revenue growth.
What do you think about the space going forward? I mean, obviously, will these two sort of factors start to get a little closer in terms of what is the perception and what is the reality?
I think yes. I'm not an economist, but when you look at the macro, we're not in a bad place. And again, you got to look at their forecasts, look at the ones raising forecasts. And I'm definitely positive despite all the concern.
Now, another part of your coverage universe includes the media sector. I spent 25 years in traditional media before I took on this role. So I have lived some of the downturn, to put it nicely. What is going on out there?
So you think about media. You've got all the traditional media companies. Streaming came along. Everybody had to try to compete with Netflix. So they all started their own streaming services, investing gobs of money, and rolling out these services, producing more content, taking content back that they got money for licensing and taking it back in so they could try to build up these streaming services. And it didn't work, OK?
So it was all about subscriber, subscriber, subscriber. Now, it's all about profitability, profitability, profitability. Everyone has turned to looking for a profitable streaming service. So the market did not like going after the subscribers. The market likes profitability more. But the questions around these streaming services, these subscale streaming services-- I mean, bundling, we used to talk about the cable bundle, all the cable channels. Now, we're going to rebundling. You have these services getting together and rebundling into packages. You got a new sports service that's coming in later this year. You have other companies bundling their streaming services. They've got to do this in order to compete, to gain scale.
So I think the focus on profitability is a good thing. But there's a question mark about, are these subscale services really going to survive? You think about all the news around Paramount, Paramount+. Was it for sale? Is it not for sale? Is it on the market? Is it off the market? That's kind of the bubble one right there. Other ones, you got to wonder-- are they going to have to come together at some point? [AUDIO LOGO]
[MUSIC PLAYING]