Savvy investors and businesses capitalize on the new, new thing to great benefit.
Artificial intelligence is all the rage. Since the release of OpenAI’s ChatGPT 3.5 in November, news commentators and business pontificators can’t seem to stop talking about the imminent disruption due to generative AI and large-language models (LLMs). Business leaders from all sectors are asked about their plans for generative AI on earnings calls and in press conferences. Government officials are calling for regulation or even a pause in AI development. Futurists warn about the end of humanity.
All the chatter is leading to a massive increase in the valuation of all things AI. NVIDIA, the maker of advanced chips powering AI, has seen its market valuation quadruple since November to a valuation over $1 trillion. Leading tech companies on the forefront of AI — Google/Alphabet, Microsoft, Apple, even Facebook/Meta — have seen their valuations spike in the past six months.
Real vs. False Paradigm Shifts
What is an executive or investor to do?
As a recent Super Bowl ad admonished: No one wants to be the “Larry” who continually dismisses game-changing technology. Imagine instead being on the forefront of integrated circuits, personal computing, mobile computing, social media or gene sequencing. Savvy investors and businesses capitalize on the new, new thing to great benefit.
On the other hand, history is littered with those too early or too eager to catch waves that never fully materialize. Who can forget the dot-com craze and crash? Billions were invested and lost on companies with “creative” valuations, despite having limited or no sales and no viable path to earnings. Similar manias gripped radio-frequency identification, data serialization and exchanges — as well as, currently and increasingly, cryptocurrencies.
In our lifetime, a lot of capital has been lost by chasing false paradigm changes and a lot of earnings missed by not paying attention to real paradigm changes. Why do large groups of otherwise accomplished and smart people persist in making such bad decisions? How can we best identify when the hype is turning to mania? Or when does the hype actually underestimate the long-lasting impact of a new technology?Also read: For most companies the payoff from artificial intelligence is going to be negative: Aswath Damodaran
The Questions to Ask
Executives and investors need to address key questions when considering the latest technology trend. And the answers to those questions are likely to depend on the specific sector.
What Kind of Change?
First, is this an evolutionary or revolutionary change? Does it impact the underlying nature of competition within the industry? Does it redefine the core value proposition to customers or change the available business models? Does it render existing capabilities less valuable or even useless? Does it open opportunities to deconstruct the value chain, allowing for new entrants to capture value in niche positions in the market?
If any of the above are the case, the new technology may be more revolutionary than evolutionary.
[This article has been reproduced with permission from University Of Virginia's Darden School Of Business. This piece originally appeared on Darden Ideas to Action.]