Mad Hedge Technology Letter
January 22, 2024
Fiat Lux
Featured Trade:
(TAKE A DEEP BREATH WITH AI)
(NVDA), (QRVO), (GOOGL), (AMZN), (AMD), (AVGO), (AAPL), (AI)
Tag Archive for: (AI)
Stocks and firms tethered to artificial intelligence won’t always have a one-way joyride to profits.
The honest truth is that the road will be met with drawbacks some years and the sector will need time to digest the new developments.
Mainstream tech has made most people believe that AI can do no wrong in the short-term future.
There is a consensus that it’s the panacea for everything and anything.
The Magnificent 7 tech firms are priced for an AI boom and the hype is there, but it will take some time for AI to really filter into meaningful balance sheet development.
We are still in the beginning stages.
It’s not surprising that the Massachusetts Institute of Technology published a study that sought to address fears about AI replacing humans in a swath of industries and found that artificial intelligence can’t ACTUALLY replace the majority of jobs right now in cost-effective ways.
It’s important to note this report because much of AI has been celebrated with no mention of cost control or benefit versus the price or expenses incurred.
Any corporate tech will need to evaluate whether it’s worth gutting whole divisions to replace it with AI.
In many cases in early 2024, this type of strategy to a workforce could turn into an unmitigated disaster.
For instance, a new AI study found only 23% of workers, measured in terms of dollar wages, could be effectively supplanted. In other cases, because AI-assisted visual recognition is expensive to install and operate, humans did the job more economically.
The adoption of AI across industries accelerated last year after OpenAI’s ChatGPT and other generative tools showed the technology’s potential. Tech firms from Microsoft and Alphabet in the US to Baidu and Alibaba in China rolled out new AI services and ramped up development plans which could serve as a canary in the coal mine for things to come. Fears about AI’s impact on jobs have long been a central concern.
Computer vision is a field of AI that enables machines to derive meaningful information from digital images and other visual inputs, with its most ubiquitous applications showing up in object detection systems for autonomous driving or in helping categorize photos on smartphones.
The cost-benefit ratio of computer vision is most favorable in segments like retail, transportation, and warehousing.
The study was funded by the MIT-IBM Watson AI Lab and used online surveys to collect data on about 1,000 visually assisted tasks across 800 occupations. Only 3% of such tasks can be automated cost-effectively today, but that could rise to 40% by 2033 if data costs fall and accuracy improves.
When getting academic about the subject, many projections feel way too ambitious.
AI won’t take over the workforce in the next few years and will struggle to make inroads before 2030.
That doesn’t mean firms like Nvidia, AMD, Qorvo, and Broadcom will not sell AI-based chips promising better AI.
That doesn’t mean firms like Google, Apple, Microsoft, Amazon, and Meta won’t feel a small AI bump in revenue.
There certainly will be some changes, but wholesale transformation is a ways off.
I believe the AI hype has gotten too far over its skis.
Tech needs to slow down and make sure it’s properly implemented and the real effects will be seen after 2030.
Mad Hedge Technology Letter
January 19, 2024
Fiat Lux
Featured Trade:
(ANOTHER CHIP NAME BESIDES NVIDIA)
(AVGO), (AAPL), (AI)
Broadcom (AVGO) has gone through several major transformations since its founding in 1991, and a chart of the stock looks like a hockey stick.
AVGO is now worth close to $600 billion and the show isn’t over yet folks, there is more yet to come.
AVGO has a history of buying growth using debt.
Prior to buying Broadcom, Avago had already acquired a long list of smaller companies to expand its portfolio of wireless, optical, and data storage chips.
By paying $37 billion for Broadcom, it gained even more mobile, networking, wireless, and industrial chips. That inorganic growth strategy made it one of the world's largest chipmakers.
Broadcom subsequently expanded into the infrastructure software market by buying CA Technologies in 2018, Symantec's enterprise security division in 2019, and the cloud software giant Vmware in 2023.
Those acquisitions should diversify its business away from the cyclical semiconductor market and curb its dependence on Apple, which still accounted for 20% of its revenue over the last two fiscal years.
Growth in the 20% range should be driven by three long-term catalysts.
First, the expansion of the generative artificial intelligence (AI) market should trigger stronger sales of its data center and infrastructure chips over the next few years.
Second, its sales of chips to mobile and IT infrastructure customers should heat up again as the macro environment improves.
Apple also signed a new blockbuster deal to buy Broadcom's 5G radio frequency components and other wireless connectivity components for several more years last May, so it won't lose its top semiconductor customer anytime soon.
Broadcom's aggressive expansion strategies have been lucrative, but the sprawl could weaken the company. If that happens, investors will be a lot less forgiving of its rising debt and dilution.
I fully expect strong double-digit revenue growth in the company's AI-related businesses.
I anticipate a proliferation of Gen AI across a broad set of data center workloads to drive strength in Broadcom's custom compute offload and next-generation Networking businesses both in the near- and medium term.
There is also a strong chance of a cyclical recovery in the company's non-AI business.
In addition, I expect synergy capture following the acquisition of VMware, to drive operating margin expansion and earnings growth well in excess of the industry average.
The last lever that will affect stock appreciation will come in the form of shareholder returns.
I do believe that AVGO will ramp up the dividends as revenue accelerates.
Profits went from around $11.5 billion 2 years ago to $14 billion last year.
It’s easy to see the chip company blow by $16 billion this year as well.
It is well on its way to becoming a trillion-dollar company.
I do believe they will reach that goal around 2030.
The stock has more or less gone parabolic and now sitting around $1,200 per share.
It’s been like that for a while now.
Any dip to around $1,100 or $1,000 would be classified as a buying opportunity.
Mad Hedge Technology Letter
January 12, 2024
Fiat Lux
Featured Trade:
(FINANCE TURNS TO AI)
(C), (AI)
Tech is at it again and I mean artificial intelligence doing the dirty jobs for senior executives.
Citigroup (C) CEO Jane Fraser is doing the extreme by slashing a big portion of the staff and a reason to feel very comfortable about this is the upcoming implementation of generative AI into the company.
The New York bank said that it expects to eliminate 20,000 positions by 2026, which will save it $2.5 billion. It also intends to shed another 40,000 when it lists its Mexican consumer unit Banamex in an initial public offering.
Each year moving forward, investment banks need less humans, because software is replacing the need.
Gone are the moments when finance degrees were the hottest commodity, now it is all about generative AI.
That would leave Citigroup with 180,000 workers, which would likely make it the smallest of the big four banks in the US and reduce the overall size of its workforce by 25%. It ended in 2023 with 240,000.
Eventually, generative artificial intelligence (AI) could replace the equivalent of 300 million full-time jobs, a report by investment bank Goldman Sachs says.
It could replace a quarter of work tasks in the US and Europe but may also mean new jobs and a productivity boom.
And it could eventually increase the total annual value of goods and services produced globally by 7%.
Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.
Silicon Valley is keen to promote investment in AI in not only the United States but in a way that will ultimately drive productivity gains across the global economy.
AI will complement the way bankers work, not disrupting it - making finance jobs better, rather than taking them away.
The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated but only 6% in construction and 4% in maintenance, it says.
The first layoffs began in November 2023, affecting senior managers. Those cuts amounted to roughly 10% of senior manager roles or approximately 300 managers
The disclosure came on a day when Citigroup reported a net loss of $1.8 billion in the fourth quarter resulting from an FDIC assessment of $1.7 billion and other charges and reserves it previously disclosed.
Senior managers are mostly all bark and no bite these days as their work tasks have become irrelevant.
I believe the entire front office staff will be reduced to a pittance soon and by that, I mean single-digit staff.
According to research cited by the report, 60% of workers are in occupations that did not exist in 1940.
However, other research suggests technological change since the 1980s has displaced workers faster than it has created jobs.
The job cuts are part of an internal restructuring that Fraser has called the "most consequential" change to how Citigroup operates in nearly two decades.
Lower wage expense and higher output is a perfect recipe for higher share prices and that is exactly what we will get from Citigroup.
It’s not a surprise that C is investing aggressively in technology and IT.
The playbook is out there and employing a bare-bones staff is the new Silicon Valley and banks are applying the same model too.
Investment banks are the new tech company as every company is forced to become a tech company.
Mad Hedge Technology Letter
November 27, 2023
Fiat Lux
Featured Trade:
(5 STOCK FOR THE UPCOMING A.I. BOOM)
(NVDA), (AMBA), (MBLY), (AI), (AYX)
There has been non-stop talk about how artificial intelligence is reimagining the tech sector.
The highest quality artificial intelligence chatbot to ever grace the earth is exciting tech executives around the world.
My personal discussions with people in the know is that every tech company is now forming a work group and assembling its best engineers to figure out how to get their hands on something similar.
That being said, here are five companies that will benefit asymmetrically as this chatbot tech goes from fringe to mainstream.
Buckle up with your cowboy hat, because this type of technology will become pervasive in no time.
Since the cutting-edge chatbot was launched, there has been a massive re-rating of A.I. stocks because of the legitimacy of the technology.
It appears that chatbot AI will finally live up to the hype.
In November 2023, OpenAI Chat introduced GPT and has since shown that the software can be used in everything from writing stock reports to resignation emails to messages for dating apps
Nvidia (NVDA) famously known for designing and manufacturing graphics chips is the first stock that goes off the top of my head to benefit from this new AI craze.
The company's technology is being used for various AI integrations from self-driving cars to robots.
Nvidia's CEO Jensen Huang is one of the best leaders in Silicon Valley.
Recent forecasts estimate that a boom in Chat GPT usage could bring Nvidia revenue of between $5 billion and $14 billion over the next 12 months.
The success of Chat GPT brings Nvidia a potentially significant boost in demand for computing power.
New Nvidia chips are benefiting from the large computing requirements of AI tools such as ChatGPT.
Ambarella (AMBA) is another chip company powering the AI market. It develops semiconductors used in everything from in-car entertainment consoles to cell phones.
AMBA chips are also specifically used in self-driving cars, and the company recently partnered with German auto parts maker Continental for a joint autonomous driving project.
Mobileye (MBLY) was spun off from Intel and focuses on autonomous driving technology and driver assistance systems, which include chips and cameras. Volkswagen, Ford, and GM are among the company's customers.
Mobileye SuperVision is the top AI product at MBLY and is the most advanced driver-assist system on the market, providing “hands-off” navigation capabilities of an autonomous vehicle and designed to handle standard driving functions on various road types, while still always requiring the driver's full attention and eyes on the road.
C3.ai (AI) is a provider of software solutions in the field of artificial intelligence and owes its recent share price increase to the success of Chat GPT. Upon the announcement alone, shares rose about 28% when it was announced that Chat GPT would be integrated into its product range.
Alteryx software (AYX) is best known for data and analytics. The company is also involved in automation and specializes in artificial intelligence integration, albeit to a much lesser extent than competitors like Google and Meta.
There are rosy days ahead for AI stocks that will ride on the coattails of the most important trend in Silicon Valley.
Mad Hedge Technology Letter
October 11, 2023
Fiat Lux
Featured Trade:
(QUESTIONS POP UP ABOUT GENERATIVE AI)
(GOOGL), (AI)
Google is worried that generative artificial intelligence isn’t as accurate or as useful as currently advertised.
There have been major disagreements among internal Google engineers about whether this service is additive at all.
Google product managers, designers, and engineers have used a chat forum to openly debate the AI tool's effectiveness and utility, with some questioning whether the enormous resources going into development are worth it.
The problem with a great deal of the data they are using to build the software is they cannot independently verify whether it is true or not.
The AI systems are trained on massive amounts of text that form the building blocks of chatbots, but this text is just idling on the internet and that doesn’t mean it's accurate.
Last month, Google unveiled its most ambitious update yet: connecting Bard to its most popular services, such as Gmail, Maps, Docs, and YouTube.
However, rolling out these new updates has coincided with a drove of new complaints about the tool generating made-up facts and giving potentially dangerous advice.
Google’s thousands of low-paid contractors training Bard use convoluted instructions that they’re asked to complete in minutes.
In my opinion, Google is attempting to roll out this product as fast as possible without really focusing on the quality.
Inside and outside the company, the internet-search giant has been criticized for providing low-quality information in a race to keep up with the competition, while brushing aside ethical concerns.
For Google, ensuring the success of its Bard AI chatbot is of utmost importance. The company is far and away the leader in search, its financial lifeblood generates about 80% of parent company Alphabet’s revenue.
At Bard’s launch, the company was upfront about its limitations, including the possibility for the AI tool to generate convincing-sounding lies.
Google takes advantage of an army of underpaid and overworked contractors in order to refine Bard’s responses and I believe that is an extremely rash strategy.
Executives also must consider the consequences of the enormous costs needed to maintain large language models.
Google has reacted by downplaying fears, lack of usefulness, and the sheer fact that they might not have any idea what they are doing.
We are in unknown territory now with unproven technology and Bard could end of becoming a giant bust.
When is the point where engineers egging each other on start to question the core project? Remember, these engineers have monetary and personal incentive to continue with this because they are getting paid around half a million dollars per year.
If this project ends in humiliation for Google, they just move on, take the next engineering job, and Google writes down the losses.
The beginning of 2023 was beset with AI euphoria only to move into the latter half of 2023 where investors realize that it would take a while for any of this technology to meaningfully boost revenue.
Questioning the idea in itself is also another downgrade to AI momentum, and investors need to be cautious right now instead of throwing money at whatever sticks.
At some point, management will need to look at this project closer and not make this only about catching up with Microsoft’s ChatGPT.
Next year will go a long way to prove whether this technology is legitimate or not and we stay on a knife edge to see how it plays out. My bet is nothing really hits until later in the year.
Even if it doesn’t go exactly to plan, I do believe there are some revenue-boosting applications from this technology in the long term so it’s not exactly all negative for Google.
It could be that Google realizes that using the best data coupled with the best engineers is a better combination than what they are doing with Bard.
