Are Microsofts the new Apple of AI?

Microsoft piercing through Apple’s market cap last week stokes the debate on whether AI is creating an investment bubble. The frenetic rise in US tech stocks for the better part of 2023 makes it a likely scenario. AI represents a new asset class, without precedence for valuation. There is consensus among investors and technology leaders that AI is the next big thing. And returns of the stocks that are pioneering AI – Apple, Microsoft, Alphabet, Amazon, Nvidia and Meta Platforms – are being unanchored from earnings. But there is no retail investor frenzy yet. Even at its current lofty valuation, Microsoft is trading at less than half of its peak during the dotcom bubble. Besides, the capitalisation seesaw between Apple and Microsoft is weighed down by iPhone sales in China as much as it is by the latter’s big bet on OpenAI.

The concentration of investor investment is tracking the spread of AI. The diffusion rate of the tech serves to prick excessive buildup of investor interest in companies that are driving horizontal AI that has economy-wide application. As of now, capital is piling up with the pioneers. But it should move as adapters, enablers and disruptors emerge. Generative AI’s productivity-enhancement capabilities will become clearer as smaller companies adapt LLMs for industry-specific use cases. An ecosystem of startups will grow out of the need to tailor AI for individual applications. This will draw new players that will innovate to disrupt legacy industries. Then, there will be the leaders and laggards in AI adoption, which will create a new basket of opportunities for investors.

AI’s transformation potential is not in doubt. It’s just too early to see the needle-moving applications. Investors piling on to the wagon may gain by waiting for a few of those to appear on the scene. Revolutions, technological or otherwise, have a fat tail.