The business landscape is on the cusp of a monumental shift, one driven by the relentless advancements of artificial intelligence (AI). Despite the clear potential of AI to disrupt traditional business models, the precise manner and cost of this disruption remain elusive. Even leading figures in the AI revolution, such as Elon Musk, Sam Altman, and Mark Zuckerberg, acknowledge the uncertainty surrounding AI’s future impact.
Understanding AI Investment
Goldman Sachs has forecasted that global AI investment could reach $200 billion this year, potentially constituting 2% of US GDP by 2030. However, these efficiency gains are expected to take years to materialize, and measuring a reliable return on investment is already complex. This uncertainty brings new challenges for investors, who must recalibrate their expectations regarding capital expenditures and returns.
Adjusting Shareholder Expectations
Shareholders might need to rethink their traditional expectations about how and when investments will yield returns. For instance, advertising giant WPP is heavily investing in AI, but whether this will prove to be a wise decision remains to be seen. History is replete with examples of investments initially deemed imprudent, only to be vindicated years later.
• WPP boss Mark Read to leave amid industry turmoil created by AI
Embracing Failure and Risk
Investors must also prepare for the inevitability of failures. Some AI projects will not succeed, much like dry drilling holes in mining. These sunk costs are often accepted in the hope of eventually striking gold. This mindset might need to extend to other sectors, requiring companies to invest speculatively in AI to stay competitive. The challenge isn’t just about creating more productive systems but also about determining the appropriate level of investment. What if a custom AI solution becomes obsolete with the rise of open-source alternatives?
Shifting Valuation Models
As AI becomes a crucial factor in corporate success, the methods investors use to value companies may also change. Traditionally, tech firms have been valued on potential rather than earnings, an approach that may become more widespread across various industries. The pharmaceutical, manufacturing, and insurance sectors are increasingly AI-enabled, using technology to discover new drugs, reduce production costs, and model risks more accurately. As AI spending becomes vital for future success, the challenge lies in evaluating its effectiveness without fully understanding the tools being developed.
• AstraZeneca strikes multibillion-dollar research deal with Chinese group
National Implications
The implications of AI investments extend beyond businesses to include national economies. The UK government’s ambition to transform the southeast into a “new Silicon Valley” highlights the importance of AI in national strategies. While AI investments by robust companies like WPP may attract scrutiny, similar investments by financially constrained governments will be even more closely examined.
In this AI-driven era, investors and governments must adjust their expectations and timelines for returns. Capex misfires may gradually become an accepted part of doing business, rather than being viewed as significant failures.
Note: This article is inspired by content from https://www.thetimes.com/business-money/companies/article/investors-need-to-take-a-leap-of-faith-on-artificial-intelligence-gljh0ptvd. It has been rephrased for originality. Images are credited to the original source.