Mad Hedge Technology Letter
February 28, 2024
Fiat Lux
Featured Trade:
(GOOGLE HITS A ROUGH PATCH)
(GOOGL), (MSFT), (OPEN AI)
Posts
Google’s stock has felt the pain the last few days.
Why?
Its generative AI has gone wrong or at least producing controversial images as Google’s AI technology produces historical figures in different ethnic races.
The backlash was so bad that Google CEO Sundar Pichai issued a mea culpa.
The incident marks the latest misstep from Google as it scrambles for positioning in the blossoming market for AI products and plays catch up to Microsoft (MSFT) and its AI partner OpenAI ChatGPT.
In a memo to staff on Tuesday, CEO Sundar Pichai said, "I know that some of its responses have offended our users and shown bias — to be clear, that’s completely unacceptable, and we got it wrong."
The underwhelming AI performance means that Google is falling way behind other competition.
All investors care about these days is the trajectory of AI and stocks go up just based on that.
There must be a question of whether the generative AI research they are doing is good enough and if they have the right talent to compete.
Right now it certainly doesn’t look good.
Google is in the unfamiliar position of not being the leader in a core, [machine learning]-driven technology.
Google is trying hard to catch up and now needs to go backward to repair a core technology component while dealing with a major PR blunder.
Google's first AI fumble came a year ago when the company released a demo of its AI chatbot, Bard, a few months after ChatGPT exploded onto the scene.
Google's chatbot spits out an inaccurate response in a promotional video that was widely circulated online. In the immediate aftermath, skittish investors wiped $100 billion from Google's market value just as Microsoft's fortunes climbed.
Google explained in a recent blog post that it tuned its Gemini image generation tool to show a range of people of different ethnicities and other characteristics but that it failed to account for cases that should not depict diversity.
This is setting up for a great buy-the-dip moment for the company.
In the short term, Google investors have been burnt.
The Mad Hedge Tech Letter had a bullish position in GOOGL and it got torched.
However, Google has been a good short-term trade since it became a duopoly with Meta.
The fact is that Silicon Valley is turning into a race for AI and Google are the kings of search using the older generation.
That doesn’t quite mean they possess the correct talent to compete in AI.
Search was never geared towards this one area of technology that has become the newest thing.
Google has dropped 12% since its January highs which is surprising because they have been a solid bet for years to rebound from any weakness.
Now Google has the unenviable task of proving to investors that they have the ability and capacity to go toe to toe at the high levels of the AI race.
We won’t see deteriorating ad numbers soon, but over time, this could become a slow burn of them ceding search share as AI becomes integrated into the search business.
I still believe Google is worth holding long-term, but we are seeing a mild pullback after a great 2023.
Mad Hedge Technology Letter
November 20, 2023
Fiat Lux
Featured Trade:
(MICROSOFT HITS A HOME RUN)
(MSFT), (OPENAI)
After the smoke clears, it is obvious to the naked eye that the winner of the Sam Altman firing is Sam Altman and Microsoft.
Sam Altman is the former OpenAI CEO and the face of AI.
The board at OpenAI just gave away the company to Microsoft.
The event is still reverberating around the world and is a shocker for anyone and everyone involved in technology.
It is similar to if Elon Musk is fired by the board of Tesla.
Something of this magnitude has a lot of unintended consequences and from first glance, it appears that the board of directors overplayed their hand.
The only reason why the board got its way is because of the government structure in place that allows the power of management.
The best NFL teams don’t fire their franchise quarterback or lose them for nothing.
In an ironic twist, OpenAI's biggest investor Microsoft said it is hiring Sam Altman to lead a new advanced artificial-intelligence research team, after his bid to return to OpenAI with the board that fired him declining to agree to the proposed terms of his reinstatement.
OpenAI has been relegated to second-tier status and Altman has been promoted to the big show.
Microsoft Chief Executive Satya Nadella posted on X late Sunday that Altman and Greg Brockman, OpenAI’s president and cofounder who resigned Friday in protest over Altman’s ouster, will lead its team alongside unspecified colleagues.
Altman was blindsided by the firing which shows there was something horribly wrong with the relationship between the board and Altman. It sure smells like a power struggle.
Altman was the key to the company’s close relationship with Microsoft, which became highly dependent on its technology and remains OpenAI’s largest investor with a 49% stake.
Ultimately, Altman’s insistence that the current board resigns was rebuffed.
It would have made no sense for him to go back for anything less than that plus a big salary hike.
Among all the investors, Microsoft might be the most deeply intertwined in the fate of OpenAI, and the startup’s turmoil has been a liability.
Beyond being OpenAI’s largest backer, Microsoft has reoriented its business around the startup’s AI software.
The first takeaway is that this is great for Microsoft’s stock because of the boost it will deliver to its AI business.
MSFT shares would have sold off by 10% if Altman left completely.
MSFT now has the best of breed working directly for them after becoming frustrated by the lack of insight into OpenAI.
A lack of a board seat made the transparency even blurrier.
Opportunistically, expect a mass exodus of OpenAI’s best to join Microsoft’s new AI division.
Most of the employees are already demanding for the board to resign and this situation is on the verge of erupting into a toxic mess.
Poaching is the oldest game in town and MSFT will aggressively look to add to its staff. OpenAI will be a shell of its former self soon because MSFT has the resources to pull it off. Everyone jumping ship will be granted a massive pay rise and restricted stock.
Even if MSFT needs to write down its initial AI investment into OpenAI, it pales in comparison to the potential and bottom-line boost that Altman could muster for the Washington company.
Free agents of this caliber don’t usually jump ship for free and this is a major coup for Microsoft, Altman, and anyone else that follows him to MSFT.
Half the value of OpenAI is wrapped up in Altman himself.
He is now tasked to bring what he did from OpenAI and then develop it, and this time around he has unlimited resources to deploy.
This is another win for the Magnificent 7.
I am highly bullish on MSFT.
MSFT HITS A HOME RUN WITH ALTMAN
Mad Hedge Technology Letter
July 7, 2023
Fiat Lux
Featured Trade:
(TRAFFIC SAGS FOR THE GENERATIONAL TECHNOLOGY)
(OPENAI), (NVDA)
OpenAI’s splash into AI was the secret sauce as to why tech stocks have gone parabolic in 2023.
The platform achieved a remarkable milestone by amassing 100 million monthly active users quite early on, setting a record for the fastest-growing user base.
With ChatGPT’s widespread absorption, OpenAI has been looked at as the savior for revenue models in Silicon Valley.
However, this period of AI enthusiasm has proved to be short-lived, as the technology experiences its first real pullback.
Based on the latest data, ChatGPT experienced a 9.7% decrease in desktop and mobile web traffic during June. The site also saw a decline of 5.7% in unique visitors.
This was followed by an 8.5% decrease in the average time users spent on the site. In the United States, the month-on-month traffic decline for the website was recorded at 10.3%.
The downtrend in traffic is quite surprising considering that groundbreaking new technologies which are still in their honeymoon phases never report any decrease in eyeballs whatsoever.
There's been a lot of buzz around artificial intelligence since ChatGPT was released seven months ago. About a month and a half before the chatbot was released to the public, the stock market bottomed in a bear market around the middle of October.
I am not saying the bottom will fall out of tech stocks, but the gaps up will probably cool down in the short term.
Take example one stock that has performed spectacularly – Nvidia (NVDA).
They have even managed to achieve this against a backdrop of challenging macroeconomic headwinds and a hawkish Federal Reserve.
The drop in ChatGPT interest is a warning sign that the beautiful girl has hit the wall.
It can’t be as simple as investors cheering on AI from the sidelines and then stocks go magically up. It’s not that easy.
The inherent technology needs evidence of outperformance and cannot lack substance.
A significant majority, comprising 61%, of ChatGPT’s user base consists of individuals from Generation Z.
This AI tool has gained considerable popularity for its educational applications.
For example, according to a research report, respondents reported using ChatGPT for educational purposes, with 33% utilizing it for educational assistance. 18% rely on it to comprehend complex concepts, and 15% use it to acquire new skills.
Investors need to understand that sliding interest in ChatGPT could be a catalyst for the AI bubble to lose air.
At the moment, AI's risks are as massive as its potential. We won't know until ten years later whether AI's impact is more akin to the internet or the Google Glass.
There are also other issues. Sam Altman, chief executive at OpenAI, has described the cost of running the services as “eye-watering.”
ChatGPT is free to use but also provides a premium subscription, where users can pay $20 a month to access OpenAI’s more advanced model, GPT-4.
Some 1.5 million people have signed up for the subscription, but the other tens of millions aren’t on board yet. For many people, it’s not worth paying for yet.
OpenAI has projected $200 million in revenue this year.
I believe it is time to take a short-term breather for the moment in AI. AI might turn out to be the shiny star many experts think it will be, but it doesn’t take one day to become that shiny start especially when the majority of OpenAI users are applying it to do their homework.
