It always starts the same way.
One country comes up with a scary new weapon and other countries say, “Hey, we gotta get one of our own.”
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The weapons get bigger and bigger, more countries get in on the action, and pretty soon you’ve got yourself an arms race.
In the early 20th Century it was battleships. A few decades later it was nuclear weapons.
Children growing up in the 1950s and ’60s had to practice “duck and cover” drills, where they hid under their desks and covered their heads with their arms in case of an atomic attack.
Now, businesses seem to be in a different kind of arms race. Only this time it’s artificial intelligence instead of nukes.
A growing number of companies are looking to incorporate AI into their businesses. Almost two-thirds (65%) of respondents to the McKinsey Global Survey, released in May. reported that their organizations are regularly using generative AI, nearly double the percentage from the previous survey 10 months earlier.
Mark Zuckerberg, chief executive of Meta Platforms, parent of Facebook, Instagram and Whatsapp.
Loop Capital Analyst: ‘AI arms race fully on’
“Organizations are already seeing material benefits from [generative] AI use, reporting both cost decreases and revenue jumps in the business units deploying the technology,” the McKinsey report said.
Facebook parent Meta Platforms (META) and Google parent Alphabet (GOOGL) are two of the biggest tech names squaring off in the AI arena and one analyst thinks there’s a clear winner.
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On July 3 Loop Capital analyst Rob Sanderson said he was “increasingly optimistic” about Meta Platforms’ position, while he remains uncertain about Alphabet’s Google.
Generative artificial intelligence appears to have open-ended potential for the technology sector, “and the arms race is fully on,” the analyst said in a research note.
Sanderson said the path to generating return on investment, revenue models and time frame were still big questions for investors.
Loop says Meta’s strategy to advance AI tools for creators and businesses is taking shape and “makes a lot of sense.”
Meta also appears to be spending meaningfully more on tech infrastructure than Google, perhaps 50% to 60% more over the past two years, according to the investment firm. Sanderson said Alphabet’s historic valuation premium has shifted to slightly favor Meta.
The valuation delta will increasingly favor Meta over the next several quarters and likely the next few years, the analyst said.
Sanderson reiterated a buy rating on Meta with a $550 price target and a hold rating on Alphabet with a $170 price target.
Meta Platforms is scheduled to report second-quarter earnings on July 31.
In April, Meta posted first-quarter earnings of $12.37 billion, or $4.71 a share, more than twice the $5.71 billion, or $2.20 a share, of the year-earlier period. Revenue rose 27% to $36.46 billion from $28.65 billion.
Analyst were expecting earnings of $4.32 a share on revenue of $36.14 billion, according to FactSet.
“We’re building a number of different AI services,” Chief Executive Mark Zuckerberg told analysts during the company’s earnings call, “from meta AI, our AI assistant that you can ask any question across our apps and glasses, to creator AI’s that help creators engage their communities and that fans can interact with, to business AI that we think every business eventually on our platform will use to help customers buy things and get customers support, to internet coding and development AIs, to hardware like glasses for people to interact with AIs and a lot more.”
Alphabet faces ‘transitional risk,’ analyst warns
For Alphabet’s part, CEO Sundar Pichai has maintained that the search-engine giant has been “an AI-first company since 2016, pioneering many of the modern breakthroughs that power AI progress for us and for the industry.”
“We have the best infrastructure for the AI era,” he said during the company’s earnings call in April. “Building world-leading infrastructure is in our DNA, starting in our earliest days when we had to design purpose-built hardware to power search.”
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Meanwhile, on June 28 Rosenblatt Securities downgraded Alphabet to neutral from buy with a $181 price target.
The firm said that it saw “multiple areas of transitional risk” for Alphabet and recommends “stepping back for a little while to see how the company handles it.”
These areas of risk include artificial intelligence’s impact on search, including what’s likely to be at least a transitionally negative impact on search-advertising revenue as AI overviews are layered in, the firm said.
Rosenblatt also sees nascent evidence of Google losing search-market share to Microsoft’s (MSFT) Bing.
Google gets about 86.6 billion visits per month, compared with Bing’s roughly 1.4 billion visits per month. But the user base is growing, as Microsoft adds new features. A month after launching its AI update last year, for example, Microsoft’s Bing reached more than 100 million daily active users, according to Business Insider.
In addition, Rosenblatt said the transitioning of search ad revenue to retail media networks seems set to accelerate as retailers such as Walmart (WMT) follow Amazon’s (AMZN) lead and push into this arena.
Retail media networks are retailer-owned advertising platforms that run on their websites or apps.
Revenue for retail media networks grew by more than $10 billion in 2023, reaching $119.4 billion, according to a recent report from the media investment company GroupM. The networks are expected to grow revenue 8.3% in 2024, the report predicted
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