AI's continued adoption requires it to be economically viable for companies to justify the cost at some point.
Less than two weeks ago we had a featured article outlining the fears around an AI bubble and while there are plenty of legitimate concerns, the main takeaway was that if earnings continue to grow along with spending, then the AI run can continue (read more here). However, that is a big “if” especially since technology becomes more widely available, the cheaper it gets. Those that were around in the 1990s may remember the fiber optic cable craze before a few innovations drastically cheapened the price for those cables. While the cost fluctuations of AI may not be that extreme, its continued adoption requires it to be economically viable for companies to justify the cost at some point. In that regard, news surrounding Microsoft (MSFT) dropped this morning that it was reducing sales quotas on AI-related products as companies have shown resistance to the overall benefits of AI relative to its costs. MSFT fell on the news before the market opened before more news came out refuting the first report (CNBC). While the first report was refuted, it does show the fragility of the AI space in the sense that many of these companies must grow earnings significantly to justify current prices. Microsoft did pullback alongside the broader market in November but remains a strong buy via our technical attribute rating system, so the technical picture is still strong.
If AI technology does get cheaper over time or becomes too expensive relative to its usefulness to create demand destruction, we’ll likely see margin compression from companies in the space. This doesn’t only mean that companies on the cutting edge of AI will be impacted, the infrastructure build out necessary for AI’s projected track would also be heavily impacted. One fund that was recently launched in the space is the Defiance AI & Power Infrastructure ETF (AIPO).
While it has limited price history, AIPO and other AI infrastructure funds are worth watching to gauge how the companies involved in the AI buildout are performing. These are the companies that may be first to show cracks before the big AI names as their immediate results depend upon the scale of buildout. For example, if AI becomes more energy efficient, it would show up in the performance of energy companies involved in AI. One current example is Constellation Energy Corporation (CEG). CEG is up 62.56% year-to-date and has a strong technical attribute rating (4 out of 5) but has slowed down in recent months and is just a couple of boxes from entering a negative trend. Nonetheless, the holdings within AIPO are worth watching either for stock ideas or indications that the tide may be shifting for the overall space.
