AI Deep Dive

by Overheard Wall Street May 1, 2023

Intro

Over the past few decades, tech investors have looked past unprofitable startups and asked one main question - what’s going to be the next breakthrough technology that will change everything?

And it turns out we might have finally found it. ChatGPT was released in November 2022 and triggered an AI revolution that’s got even the biggest names in the tech game - Google, Apple and Microsoft - racing to keep up.

And this is just the beginning. Last week Nvidia’s CEO told investors that we’re at the iPhone moment for AI, which means that this cutting-edge technology is going to impact every industry and transform the way we work.

PwC says AI could boost the global economy by $15 trillion by 2030. And some major companies are spending tens of billions of dollars investing in and building up their internal AI capabilities.

But is it too late to get in on the action? With astronomical computing costs and economists warning of an AI bubble, investors may be hesitant to jump in.

Generative AI

Generative artificial intelligence uses algorithms, models, and other forms of machine learning to generate new and original content. A chatbot is an AI-powered application that simulates human conversations through responding to inputs in a conversational manner.

Chatbots have been around for a minute. You’ve probably used chatbots before for customer service requests or other forms of virtual assistants. Engineers have been trying to develop generative AI since the 1950s. And AOL’s virtual assistant was one of the first big-time players in the space in the 1990s and 2000s.

But OpenAI changed the game when it developed and released ChatGPT. OpenAI was founded in 2015, and had some big time backers like Sam Altman, Elon Musk, and Peter Thiel.

OpenAI launched GPT-3 in 2020 and said it could summarize legal documents and propose code.

But when the company released ChatGPT to the public, it became all the rage.

OpenAI

OpenAI didn’t really expect much fanfare when they released ChatGPT. ChatGPT’s capabilities weren’t that different from GPT-3 released a few years earlier - the user interface was just much easier to use.

ChatGPT’s founders thought they were releasing a ‘research preview’. But they weren’t ready for what came next.

ChatGPT literally took the Internet by storm, becoming the fastest-growing Internet application in history, reaching 100 million users in just under 2 months.

OpenAI might have thought they were just releasing a demo and research preview. But they might have accidentally set off a multi-billion dollar arms race.

AI Arms Race

The ChatGPT frenzy caught even the largest tech companies off guard. Microsoft and Google raced to change their corporate strategies and pour billions of dollars into expanding their chatbot capabilities. And Meta and Apple started to flex their generative AI offerings on every investor call.

Microsoft already had an initial $1 billion investment in the ChatGPT craze, but the company raced to make a staggering additional $10 billion investment in OpenAI, and announced plans to integrate generative AI into its Office software and search engine, Bing.

Google even declared a corporate emergency called “Code Red” in response to ChatGPT and built out a rival chatbot called Bard. Both Google and Microsoft have the mantra of “moving fast.”

Bubble or Revolution

Investors are taking notice and placing their bets on companies that are incorporating AI into their strategies. Investors are willing to risk it all on the potential market disruption of generative AI, hoping it could be like investing in Microsoft before Windows or Apple before the iPhone.

But some experts say that, right now, generative AI enthusiasm is misplaced.

After all, ChatGPT is just using algorithms to predict what comes next for an output - they’re not actually synthesizing or providing deep analysis, at least not yet. And while OpenAI’s chatbot is looking like the real winner now, we have no idea what generative AI will look like five or even ten years from now.

In an intensely competitive field, tech giants are willing to go all-in and prioritize growth over everything else.

And it’s not just the tech giants. Many startups are rebranding themselves as AI companies, even if that claim isn’t necessarily rooted in the truth.

From our perspective, imagine if there were a way to gain exposure to the AI industry without having to pick an AI product this early in the game. And fortunately, retail investors have the ability to invest in the underlying technology that’s powering the AI revolution.

NVIDIA

At the heart of the AI revolution lies the need for immense computing power, and no company is better poised to meet this demand than Nvidia. With its cutting-edge supercomputers, graphics processors and AI-focused software, Nvidia has established itself as a leader in the field of generative AI.

When the founders of ChatGPT revealed that they built the chatbot using a Nvidia DGX AI computer, Wall Street investors began focusing on the chip maker.

Equity analysts are hailing Nvidia as the new de-facto AI standard, and the demand for Nvidia's products and services is only getting stronger. In its last earnings call, Nvidia had already set a high bar for itself, but the company said last week that it is seeing even stronger demand in its cloud division.

Nvidia’s Product Offerings

ChatGPT was built using NVIDIA’s DGX A100 computer, which was released in 2020 at a cost of $200,000. This computer was half the price of its predecessors at the time of its release.

But NVIDIA didn't stop there. They also recently launched DGX Cloud, a more flexible way for companies to scale up their AI capabilities. Starting at $37,000 per month for a single node, DGX Cloud allows companies to access the power of the DGX AI computer without having to invest in the hardware themselves.

This provides a more flexible way for companies to scale up their AI capabilities. But DGX Cloud is also designed to work seamlessly with the DGX AI computer, making it a great option for companies that already have the hardware in place.

Bulls

Think of Nvidia as providing the building blocks for generative AI. Nvidia’s unique computing capabilities will help serve companies across a wide variety of industries.

1. Market Leader

Nvidia has been hailed as the de-facto AI leader by analysts and industry experts, and the AI race is ultimately Nvidia’s to lose.

2. Strategic Partnerships

Nvidia has inked strategic partnerships with some of the biggest players in the Big Tech space, including Google, Microsoft, and Meta.
With large tech giants willing to spend billions of dollars in the AI space, Nvidia is well-positioned to grow and serve a variety of companies.

2. Diversification

Nvidia has a wide variety of product offerings from its DGX AI computers or its DGX Cloud platform. Nvidia also manages data centers and has a stong graphics department. Before the AI wave, Nvidia’s largest segment was its gaming industry division.

3. Long-Term Prospectives

In addition to powering AI, Nvidia has strong exposure to other high-growth fields such as 5G, cellular, autonomous vehicles, robots, and the metaverse.

Bears

Inventory Pile-Up

Weak sales of graphics cards have led to an inventory pile-up at Nvidia.
Nvidia has routinely written down its inventory at a loss, which could impact its financial performance going forward.

2. Reliance on Gaming Industry

3. Short-Term Prospectives

Shorter-term investors may want to stay away. While we are confident about Nvidia’s long-term growth, the company’s stock price may struggle to grow consistently in the short-term at its valuation.

Conclusion/Recommendation

It’s going to be hard to pick winners and losers in the generative AI space right now. The large computing costs are a significant barrier to entry for newcomers, so it’s likely the Googles and the Microsofts of the world will reign supreme.

That said, we are confident that Nvidia’s underlying technology will remain a critical part of the generative AI infrastructure for years to come. With strong partnerships with key players, to a wide variety of capabilities, Nvidia is the backbone for generative AI. And with a strong focus on growth, we recommend investors consider buying Nvidia.

In 2023, expect continued progress in chatbots and other forms of natural language processing. This trend is likely to continue, with more advanced language models being developed and trained on increasingly large datasets.

You’ll also see companies like Apple expand their AI capabilities to fit current product offerings (Siri, video editing) - on March 27th, 2023 Apple acquired video editing startup WaveOne.

And in the startup landscape, you might see VC funding dry up, but investor enthusiasm likely isn’t going away anytime soon.