Head of Equity Strategy
Summary: Google and Microsoft are in a fierce battle to lead the AI technology and with the recent update from Google to its chatbot Bard the market has completely changed its perception of Google. It was thought that the company was lagging Microsoft, but maybe it is actually leading the AI technology race. We take a look at the AI battle between the two companies which will be one for the ages. We also take a look at the different streams of opinions forming about AI technology and what to expect in terms of regulation.
After Meta’s failed bet on the Metaverse, it should be clear by now that Google and Microsoft are the two giants battling for the lead in AI. Amazon is awkwardly off in this race and has lost its attraction among investors following its failed investments during the pandemic and failed growth bet on voice assistant technology. Apple is clearly missing from the AI race and are going after other businesses such as software for cars and health services related to its Apple Watch. The AI race kicked into gear when Microsoft on 23 January 2023 announced its $10bn investment, its third and biggest investment into OpenAI following investments in 2019 and 2021. Many thought that it was a big investment for an emerging technology that was losing money, but as OpenAI upgraded the underlying GPT system for ChatGPT things changed fast with company reaching 100mn users in the first two months of its launch, the fastest ever product adoption. Since Microsoft’s $10bn investment the market value of Microsoft has increased $521bn reflecting the market’s big growth expectations for AI technology.
What the price chart since 23 January 2023 also show is that Alphabet (Google) shares lost a lot of value when Google’s AI chatbot Bard made a factual error in its first demo. Immediately investors soured on Alphabet shares saying the company was behind OpenAI and would lose the AI race. Google had for years been researching heavily in AI technology and released a similar technology to ChatGPT two years ago called LaMDA. Google chose the cautious approach to AI technology because of its internal ethical boards and guidelines, but when ChatGPT was released Google had no other option than follow the lead. For years, Google’s subsidiary DeepMind, based out of London, had been making ground-breaking results in games such as Go (Chinese chess) and Stratego to the protein folding problem and recently managing tokamak fusion plasma with magnets.
Combining all of the results over the years, one could argue that Google had been leading all the time and the recent extraordinary results of the updated Bard chatbot got investors to rethink their expectations for Google in the AI race. Maybe Google was leading all the time? In a recent move, Alphabet combined the Brain AI research group with DeepMind creating a combined AI research unit consisting of 1,000 scientists. This is a formidable force in AI research and especially DeepMind’s lead in many real-life applications such as protein-folding, energy optimization for data centers, and tokamak fusion confinement make us to believe that actually Google has the upper hand. One of the defining factors in the AI race is whether it will be an enterprise or consumer led trend. Microsoft has the upper hand in enterprise distribution and software, and will thus win the AI race economically if this becomes an enterprise led trend. If it becomes a consumer led trend then Google with its many consumer application across email, search, maps etc. will win. In a recent study by Critical Mass , consumers of all ages believe that Google is leading the race.
As described above Alphabet (Google) and Microsoft are in a tight AI race and any investor in the world must decide how to get exposure to AI technology. As we have talked about in several equity notes, Nvidia is the AI equivalent of shovels back in the California gold rush, but in terms of the actual AI implementation investors must decide on investing in either Google or Microsoft. They both have the economic muscles to compete and invest in AI with Alphabet’s latest fiscal EBIT of $74.8bn while Microsoft had EBIT of $83.4bn. If we take a look at valuation then Microsoft is valued at 2.6% free cash flow yield while Alphabet is valued at 4.8% suggesting the market is betting on Microsoft for now. But as the recent price action has shown the market is also aggressively repricing Alphabet shares.
There seems to be three competing ideas about AI as to what it means for our civilization. There is the positive view of the Silicon Valley optimist that believes all technology ultimately is good for humanity and that AI technology will turn out to be extremely positive for our society. People in this camp are Yoshua Bengio (professor and computer scientist) and Yann Le Cun (Chief AI Scientist at Meta). Sam Altman, the co-founder and CEO of OpenAI which is behind ChatGPT, was initially also in this group and this is confirmed by OpenAI’s aggressive bid to release ChatGPT despite many ethical concerns over the technology. Sam Altman has since balanced his initial one-way positive attitude towards AI (see next section on AI regulation).
In the opposition camp we find the pessimists that are toying with the ideas that AI technology could lead to the downfall of our species with most notable people in this camp being Max Tegmark (professor at MIT) and recently Geoffrey Hinton, one of the early and major contributors to the current AI field, has turned significantly negative on the prospects of AI for humanity leaving his position at Google to participate in the formation of public opinion on the subject.
The last camp represents a group of scientist concerned about causality and this group claims while current AI systems are impressive in many ways they are still just correlation machines and thus are not able understand our world in any causal way. Microsoft scientists experimented with the new AI systems late last year asking the AI to stack in a stable manner a book, nine eggs, a laptop, a bottle and a nail which requires an understanding of our physical world. The answer was clever and the scientist suggested that maybe they were witnessing a new kind of intelligence. Later a group of AI sceptics added a bit of variation to the same question and saw immediately that the solution the AI provided showed that it has no understanding of the physical world.
Sam Altman participated yesterday in a US Senate committee hearing on AI discussing many themes related to AI from regulation to copyright models. Sam Altman said that government regulation of AI is crucial to avoid the technology to become a runaway train and believes in a government AI licensing model. He also said that OpenAI is not making any money and that every time someone is using ChatGPT it loses money. He also said that he worries about the technology and especially how it could harm children.
After the committee hearing Senator Blumenthal said the US Congress cannot be the gatekeeper of AI regulation and the FTC does not have the capabilities to it, and finally AI regulation should be part of a broader technology regulation. There is no doubt that regulation of AI is needed to ensure that it is used in a correct manner and not for harming society, but with regulation comes the potential of regulatory capture by big firms and limited competition if not done correctly. Regulation has the potential benefit for the firms involved in AI that it will increase the barrier to entry and thus improve profitability.
Sam Altman also talked about the generative output of AI systems with OpenAI’s Dall-E 2 AI image generator being able to produce images from text input. The generative AI comes with two risks. The first one is the risk of copyright infringement and the lack of pay for artist as their original art has clearly been part of the training of the Dall-E 2 system. Sam Altman said that OpenAI is working on a copyright system to ensure payment to artists. The other risk from generative AI is that it will flood the Internet with AI generated content which then in the future will dominate the training samples of future AI systems. The question is whether that will naturally lead to a plateau in the development of this type of AI systems. For thing is for sure that AI will remain the most debated topic in 2023 among regulators and investors.
5-year price chart of Microsoft and Alphabet (Google)
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