Generative AI in the market: What can we learn from the era?

Generative AI in the market: What can we learn from the era?

Generative AI in the market: What can we learn from the era? 768 514 Tamela

As generative artificial intelligence (AI) continues to be a hot topic around the world, it’s impossible to ignore the sense of déjà vu that lingers. The excitement surrounding this technology is eerily similar to that of past technological booms, most notably the bubble of the late 1990s. So, one must wonder, is generative AI a transformative force, or are we on the cusp of another speculative bubble? This piece aims to unpack this question by examining key aspects of this complex landscape, all while drawing valuable lessons from the era of yesteryears.

The promise of the revolution was exciting, offering unprecedented opportunities. Investors were so infatuated with the allure of “new economy” businesses that fundamental financial metrics often took a backseat. Today, as AI-driven solutions offer groundbreaking changes across sectors, it’s crucial to consider if organisations are laying solid foundations or are merely captivated by the gleam of new possibilities.

When the Internet first made its commercial debut, it paved the way for revolutionary business models, with Amazon and eBay changing the face of retail. Fast forward to today, and we see AI providing similar revolutionary shifts. Companies like Tesla in automation and OpenAI in natural language processing are setting new industry benchmarks. However, with great potential comes great risk which should heighten scrutiny. As businesses automate their supply chains, marketing strategies, and customer service, the focus should be on adding genuine value rather than just integrating the latest tech for the sake of it.

In the aftermath of the bubble, the “Web 2.0” era ushered in a mix of genuine value-adding companies like Facebook and Salesforce, but also a fair share of opportunists. Today, the term “AI-powered” is thrown around liberally, making due diligence more critical than ever. The key will be to sift through the marketing hype to uncover companies that offer meaningful innovation, as this will ultimately determine the success of investment strategies.

The rise in stock prices for AI companies today is similar to what happened with tech companies in the late 1990s. The tale of Amazon’s stock price, which went from over $100 in 1999 to a low of about $7 in 2001, serves as a cautionary tale about the volatility that often accompanies groundbreaking technologies. However, by 2007, the stock had made a comeback, reaching around $100 again, and those who held onto their shares have witnessed a steady climb to $129 as of October 2023. In contrast, investors in companies like Webvan saw their investments evaporate, serving as a somber reminder that not all technology investments are resilient over time. Similarly, current sky-high valuations of generative AI companies beg the question of their sustainability. As an added risk, AI must navigate a complex maze of ethical and data privacy challenges. Rapidly evolving rules in this space can have sudden and substantial impacts on stock prices and valuations.

As generative AI continues to gain traction, the lessons from the era are more pertinent than ever. They serve as a reminder that while it’s easy to get swept up in the excitement of new technologies, it is crucial to look beyond the hype.

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Tamela’s advisory activities include providing corporate finance advice to selected clients on Listings, Rights Issues, Balance sheet restructuring, Debt Capital Markets (DCM), Equity Capital Markets (ECM), Black economic empowerment, Delistings, M&A transactions and JSE equity sponsor services. With respect to debt and equity restructuring, Tamela provides due diligence and valuation services to ensure that financial decisions are grounded in robust analytics and expert advice.

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