This factor will set apart competing gen AI tools: Analyst

Nvidia's (NVDA) latest earnings highlighted a major issue for the AI trade; despite beating earnings expectations, investors were disappointed as they looked for significant returns on massive capital expenditures (CapEx). RBC Capital Markets Internet Analyst Brad Erickson joins Asking for a Trend to break down the state of the AI trade and the technology's outlook amid a heated competition.

Erickson explains that generative AI platforms are emerging "right in front of us," pointing to software engineering efficiencies, customer support platforms, and marketing tools as examples. He also highlights sovereign AI, where countries are spending on the technology to use and access data that no one else has. He adds, "If you look at like the top four or five CapEx spenders on AI infrastructure, it's $200 billion and it's going up next year probably by more than 10%."

He explains that investors are in a position where they have to put "blind faith" into AI players, knowing that it will pay off in the future. He tells Yahoo Finance, "From my perspective, like we're taking a little bit more of a measured approach, saying, 'Look, $200 billion. Think about what you need to do to maintain operating margins.' Pretty simple math of, like, are we really talking about $300, $400 billion of marginal revenue every single year? Those are big numbers."

Erickson believes that competing AI tools from names like Google (GOOG, GOOGL) and OpenAI will ultimately "end up looking a lot of the same kind of thing." He argues that distribution is a more important factor and will likely determine the level of success.

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend.

This post was written by Melanie Riehl

Video Transcript

After a deep slump to start September, the tech heavy NASDAQ has rebounded somewhat this week.

But concerns remain due to the uncertainty surrounding the A I trade and the possibility of a super sized rate cut from the Fed sitting out at about 30% here to help us find value in Tech is Brad Erickson R BC Capital Markets Internet analyst Brad Great to have you.

Thanks for having and on set.

That's right.

Um, I wanted to ask you about this kind of big trend that we've been talking about, which is you have these tech companies and we know Brad, they're putting a a lot of money, a lot of investment in a I.

We saw some push back.

I think, in the last earnings season, some investors are saying, Listen, show us the return, then I I did.

We were talking off camera about this.

I saw Michael Dell, though on X, saying, You know what?

He was kind of comparing where we are now with a I to the early days of the Internet and and I think what he was saying was, You know, maybe everybody needs to take a deep breath at game changing technologies like a I.

They just take a while to play out before they show their true impact.

Where are you kind of sitting in this debate?

So I think one way to look at it anyways, uh, would be that there's applications that are emerging have emerged for generative A I and just a I in general that are right in front of us.

We can see them today, right?

And it's easy stuff like software, uh, software engineering efficiencies around that.

It's customer support.

It's a lot of marketing tools, right?

Think of like what Meta and Google are doing.

Um, there's some interesting things around online professional services.

And then there's sovereign A I right, like countries spending money to to to use and and and exploit data that they have, uh, that no one else has.

Right?

Those are known.

And those are nice, right?

I think the the comment you were referencing on earnings, though, is like That's not enough, right?

We're spending almost 200 billion dollars.

If you got like the top four or five Capex spenders on a I infrastructure, it's $200 billion and it's going up next year?

Uh, probably by more than 10%.

At some point, though, those investors of those companies do start to push back, force them to slow that down.

A Absolutely, I think where the the the the, uh, tweet you mentioned by by Michael Dell is interesting because I think you invest if you if you aren't gonna push back right, you have to adopt that view.

It's a little blind faith that like, Hey, I just can't quite see that far in the future of what this is gonna do.

But I know it's gonna work.

And I think you know, from my perspective, like we're taking a little bit more measured approach saying, Look, $200 billion.

Think about what you need to do to maintain operating margins.

Pretty simple math of like, Are we really talking about, like, 3 $400 billion of marginal revenue every single year?

Those are big numbers.

Le let's talk about some of these big tech companies that are spending a lot on a I that you cover alphabet.

You like that name, I think outperform rights to that.

There are some It's interesting, Brad.

So some of your colleagues on the street.

Uh, even they have buys, right?

But I sense a little, um, I. I don't even wanna call it concern, at least raising questions about what?

The long term.

What does long term search actually look like with rising competition from names like Sam Altman over at Open A I just how are you thinking about that dynamic?

So a lot of time being spent analysing like, Hey, we've heard about Claude.

We've heard about perplexity.

We've heard about chat GP T. What is Gemini gonna look like, right, There's all these competing tools.

Um, our view is is they're all gonna end up looking a lot of, you know, the same kind of thing.

Distribution is really what matters.

And so now we're talking about apple, right?

What's gonna happen?

Chat GP T is is apparently gonna be integrated with I OS 18 and and, you know, over the next month, we'll see.

Um, what is that gonna do to Google's distribution?

That's kind of the biggest question right now.

And I think you know, if you look at what's happened over in Europe, right, they implemented some of these changes where users have a choice right.

You get a phone, you get onto your browser.

You have a choice.

Of what?

Default search engine Google is gonna lose a little bit on that, but not much.

Is it also part of your optimism?

Because you just think also Google's own gen A. I innovations are gonna are gonna improve the search products, too.

Uh, yeah, I think I mean, I think they already have.

Right management talks about how they actually drive engagement increases, uh, as they've been, as they've, uh, improve that generative A I capability.

So it has helped already I I.

But again, the question I think people focusing on, like whose chat bot is better is not the right way to think about it or it doesn't matter as much.

It's more distribution, right?

Is their distribution gonna be impacted from some of these upcoming changes?