Will AI Transform the Global Economy…Or Is It A Bubble?

What is Nvidia and is its Record-High Valuation Sustainable?

Arnott expresses his views on AI and its future role in displacing skilled workers, whilst also creating more for those who know how to utilise it.

Amongst other topics, he discusses Nvidia, a semiconductor firm which powers much of the current AI boom. It is now valued at about $3 trillion, joining the exclusive Apple/Microsoft $3tn+ market cap club.  Nvidia designs chips that speed up graphic-intensive applications, including AI, media editing and video games. Prior to the AI boom, it was most well-known to those in the gaming community thanks to its advanced GPUs, able to handle the increasingly complex 3D video games of the early 2000s. Nvidia overall has been a consistent player in the tech for decades, and was founded in 1993 by Jensen Huang.

With their price point being $40,000 a chip, and competitors such as AMD producing a similar chip priced between $10,000-15,000, it is obvious that barriers to entry within this market are high. Nvidia, therefore, are able to maintain their market share regardless of their price point and benefit from vast profit margins by obtaining a large volume of sales.

In this episode Arnott expands on this, stating that, “barriers to entry are significant, but the barriers to entry don’t hold for 10 or 20 years. So over the coming decade, competitors will take significant market share and impose significant pricing discipline on that industry.” It is therefore unlikely that these barriers will hold over the next decade, allowing for the rise and dominance for competitors, such as AMD in the future.

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                                                               (Credit: gguy/Adobe)

Nvidia: Comparisons with Qualcomm & Blackberry

“Disruptors get disrupted.”

Competition lies at the forefront of any company that has a price of 25 times its sales(true as of 30th of March 2023). The history of displacement within a market has been seen via multiple different sectors over time. 

An example given by Arnott is Palm Pilot in 1999 and Qualcomm in the early 2000s, both containing a valuation larger than three. This spin off in valuation exceeded General Motors at the time. Just two years later, Blackberry replaced Palm Pilots, and five years later, the iPhone replaced the Blackberry! 

When using this theory to reflect on companies such as Nvidia, it demonstrates the precariousness of their market share when viewed in the longer term.

In addition, given semiconductors are reliant on cordial trans-Pacific trade relationships (TSMC  in Taiwan being the clearest example of this), risks are also heightened due to deteriorating US-China relations, as well as continued evolution in GPU technology, thus heightening disruptor risk from current or even new participants.

There’s also the increasing awareness of the environmental costs of AI, potentially resulting in more regulation as climate change-related events become more frequent. 

It is therefore likely that Nvidia is also at risk of being disrupted, vulnerable both to agile competitors and a range of external market factors.

It’s 2034 & You Need a Plumber - Will AI Save You?

When discussing the future job market, Arnott refers to the future of plumber jobs and the risk they face of getting replaced by AI. Whilst seemingly unimportant in a grand macroeconomic sense, this fun example represents a wider prediction; that AI’s impact & use case has been exaggerated by some in the media & PR industry!

He states that,

“the bricks and mortar side of the economy will remain the dominant part of the economy for many years to come.”

This is not to claim that Arnott is bearish on AI, but is instead sceptical about its longer term/secondary applications in the bricks & mortar economy (beyond the more obvious use cases in sectors such as medical research, media/marketing, transportation and finance).

It’s also worth pointing out that journalism has been impacted by AI relatively early compared to other sectors, potentially risking a narrative of reporters projecting their own experience onto other industries (where workflow complexities, the regulatory/legal context or even simple practical matters make AI less feasible).

Per Lekander of Clean Energy Transition gave a helpful example of this narrative oversight in his feature on the show, suggesting that legal liabilities have been overlooked relative to coverage of technological advancements. He cited the example of a self driving car running over a person, an event where the legal situation/liability still remains unclear.

Overall, Rob suggested that whilst AI is going to be ‘huge’, the wider economy is also going to experience significant growth, yet it’s ‘priced as if it’s being left for dead’!

Rob also suggested that evolution towards a more AI reliant world should not frighten individuals, stressing the importance of knowing how to utilise it to your advantage in your workflow.

“How big will AI be? Huge. That’s in the price. Roll the clock forward that same ten years and your loo needs fixing. Are you going to call AI or are you going to call a plumber?”

The Big Picture: What is The Magnificent Seven & How Are They Pioneering AI?

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                                                              (Credit: gguy/Adobe)

"The Magnificent Seven” which includes companies such as Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Meta Platforms and Tesla have a larger market value than any country in the world (excluding the US). Arnott discusses the prospect of the Magnificent Seven and its “engine for world” growth in comparison to the EU.

“The Magnificent Seven has a market value larger than all of China, larger than all of the EU collectively.”

Companies within ‘The Magnificent Seven’ are hugely contributing to the fast development of AI worldwide. With companies such as Apple developing software such as Siri, Alphabet (Google) with Google Assistant, Amazon with Alexa and Tesla developing autopilot technologies to be incorporated into their vehicles, AI is becoming embedded into our everyday lives.

This global dominance by these seven companies is leading to rapid change in the way we live, increasing our efficiency globally. However, the argument of whether these companies are going to produce larger growth and future profits than the EU according to Arnott is unlikely. The expectation in which these ‘bubbles’ are built on can therefore lead to future potential crashes if lofty expectations are not met.

“The Magnificent Seven: Whoever coined that expression didn't see the movie. Four of the seven are dead at the end of the movie!”

What Does AI Think About AI? 

But don’t take it from us. Echoing some well-known Hollywood movies, we went a little meta and asked AI to become self aware. 

So, when asking AI platforms such as ChatGPT whether AI will transform the global economy - or whether it is merely a bubble - its response was:

AI's potential to transform the global economy is significant, driven by its capacity to enhance productivity, foster innovation, and create new markets. By automating routine tasks, AI can drastically reduce labor costs and increase efficiency across industries such as manufacturing, healthcare, and finance. This shift can lead to significant economic gains, as businesses can reinvest savings into growth and development. AI-driven data analytics also enable companies to make better decisions, offering a competitive edge and fostering innovation. Moreover, AI can spawn entirely new industries, such as autonomous vehicles and personalized medicine, further contributing to economic expansion.However, some argue that the AI boom may resemble a bubble, with inflated expectations and speculative investments. The hype surrounding AI can lead to overvaluation of companies and technologies that may not deliver on their promises, potentially resulting in financial losses akin to the dot-com bubble of the early 2000s. Additionally, ethical concerns, job displacement, and regulatory challenges pose risks to the widespread adoption of AI. Despite these concerns, the consensus leans toward AI being a transformative force rather than a fleeting trend. While the journey may involve setbacks and recalibrations, the fundamental advancements in AI technology suggest it will have a lasting and profound impact on the global economy.

And there you have it, an excellent AI-generated summary which answers our headline question effectively!

Yet an article is one thing, the bricks and mortar economy is quite another. As Rob points out in his analysis, will ChatGPT help fix your bathroom in July 2034? It seems trivial of course, but the wider idea is quite literally a multi-trillion dollar question; being analysed, debated and traded on in markets across the world!‍

By Clemmie Meadon, who has completed an internship at MMP. Clemmie is currently a third-year student at Durham University studying Health and Human Sciences. She’s also completed a number of other internships around her studies, and has a strong interest in finance. Article supported by ChatGPT/OpenAI & Team MMP!

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