What happened
Shares of big tech stocks struggled on Wednesday following Microsoft’s (NASDAQ: MSFT) product announcements with OpenAI yesterday. The artificial intelligence company will help power a Bing chat product that could upend the search business and advertising with it.
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Shares of Apple (NASDAQ: AAPL) fell as much as 2.3% in trading Wednesday, Amazon (NASDAQ: AMZN) dropped 3.3%, and Meta Platforms (NASDAQ: META) fell up to 4.5%. The stocks closed the day down 1.7%, 2%, and 4.2% respectively. On a related note, Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) dropped 7.4% today after Microsoft’s announcement.
So what
Google gets a majority of its revenue from search, so it’s easy to see how that business could be impacted by an improved Bing. But the impact extends far further into big tech.
Google pays Apple a reported $15 billion per year to be the default search engine on iOS devices, and if Google’s earnings go down, that payment could too. Apple is also growing its own advertising business, and a more powerful Microsoft could peel away some revenue from that.
Amazon has also been building its own advertising business and has a very symbiotic relationship with Google (Amazon advertises on Google) and Apple (where its app is popular). It’s not clear the impact AI will have on the business yet, but Microsoft building with OpenAI means they’re not building on AWS and could take some advertising spending.
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Meta Platforms is a huge beneficiary of ad spending and uses artificial intelligence to optimize its revenue and return on investment for customers. But if Microsoft is now in the ad business with search, it could siphon off money that may have otherwise been spent at Meta.
In addition to the competitive dynamics I highlighted, Google introduced its AI tool Bard today, and an error was included in the demo. That’s not uncommon in AI responses, but it’s embarrassing for a tech company.
Now what
The only big tech stock that was up today was Microsoft because it’s the one introducing a product that could disrupt the industry. But will it?
I think the reaction today is overdone for big tech across the board. It makes sense for Microsoft to be the winner today, but the reaction to other companies is a little more uncertain. Each of the companies I’ve mentioned has its own AI tools and will likely create similar or complementary products.
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The biggest question I have is about the moat that each of these AI products has. It’s not clear if artificial intelligence will have the same network effect or moat as search, mobile devices, or even online shopping, so this may be the commoditization of some of these businesses. If that means lower profitability in the future, that’s what could put pressure on these stocks. But that’s not what we’re seeing yet, and until we do, I think this is a buying opportunity in big tech stocks.
