It is hard to overstate the impact that the so-called Magnificent Seven tech behemoths — Microsoft, Apple, Nvidia, Google parent Alphabet, Amazon, Facebook parent Meta and Tesla — have had on global financial markets and the economy. 

Their combined value has grown an extraordinary 460% over five years, massively outpacing the broader market, the S&P 500, which has risen a “mere” 76%. Their market capitalisation is now just under $12-trillion, or roughly 30% of the entire US stock market. The valuation of these seven companies is almost 12 times the entire JSE.

As one hedge fund investor has quipped, there is a potential Cold War analogy at play here; superpowers feeling compelled to outspend each other on weapons that for all practical purposes are unusable.

However something seems to have changed. 

Tesla was the first to go, shedding almost 35% of its value since mid-last year. Investors have started to question the hypothesis that the global motor industry is moving inexorably towards electric vehicles, with Tesla recording 8% lower EV deliveries last quarter than 2023. 

Tech leviathan Apple was next. Apple was until recently the largest company by market cap in the US (now overtaken by Microsoft), representing almost 6% of the S&P 500. Its share price is down 8% in 2024, due to lower iPhone sales. Perhaps even more worrying for the company is that its business model is under attack by competition authorities in Europe and the US, who believe Apple is a monopolist.

The broader story

However behind these company-specific issues a broader story is playing out. These seven companies are in the midst of what can be described as the great artificial intelligence arms race.

All seven companies, and the market in general, is under no illusion as to what is at stake. Meta, for example, is on course to raise CapEx, most of which will be spent on AI investment, by up to 42% to a simply colossal $40-billion, while Alphabet is forecasting a 49% increase to $47-billion. In the last quarter, CapEx at Microsoft increased 79% compared with last year. At Tesla, it rose 34%. 

Simply put, management of the most valuable companies on Earth are literally betting the house that AI is not just part of the future. They are assuming that it is the future. 

The problem is that it is far from clear whether AI is indeed the future, or if it is, how easy it will be to monetize? The worry for investors is that as it is impossible to get a clear sense of the revenue-generating potential of AI, is spending just going off the rails?

Up until now Microsoft has been the first to show even nominal revenue growth from its massive AI investment. It has rolled out a range of services, including meeting transcription and spreadsheet analysis, available for $30 per person per month, as well as a five-year, $1.1-billion deal with Coca-Cola to use cloud and AI services.

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However the clear winner thus far is chip maker Nvidia. It currently dominates the lucrative market for the accelerators that power data centres running the complex computing tasks required for AI development. A substantial chunk of the vast sums of CapEx being spent will, almost inevitably, be allocated to Nvidia chips. This is because — for the time being at least — these chips have a huge advantage over any others for what is required to run AI. The stock is up an eyewatering 204% over the last twelve months.

Several possible outcomes

This scale of investment into AI is clearly a huge bet, and one which has several possible outcomes. First, AI turns out to be productivity-enhancing but impossible to monetize. Ostensibly this would hurt these companies, potentially existentially, while being a plus for humanity. 

Second, AI turns out to be useful and profitable, in which case the world will be even more in tow to these tech heavyweights. This is clearly what CEOs such as Mark Zuckerberg and Elon Musk are desperate to prove.

Third, other than being a fancy Google search, AI does not turn out to have any meaningful impact on productivity, and therefore becomes just another investor fad dreamed up by hedge funds desperate to inflate yet another bubble at the end of an increasingly stale business cycle. Perhaps it will be remembered much as bitcoin was in 2021. I certainly find fewer and fewer useful applications for Chat GPT. 

As one hedge fund investor has quipped, there is a potential Cold War analogy at play here; superpowers feeling compelled to outspend each other on weapons that for all practical purposes are unusable. 

The final outcome — that AI is actually far more powerful than any of these companies believe, and that it will increase productivity but also replace us — is the worst of all possible outcomes. If this is true and it effectively renders humanity irrelevant, then these CEOs — by that stage probably hiding in their New Zealand Armageddon bunkers – will have more to worry about than the share prices of their tech companies. BM