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The stock market has spent this year moving from one artificial intelligence (AI) anxiety to another. But the endgame might be coming into view.
Concerns about overinvestment in data centres seem to have subsided for the time being. Another issue however, might be on the horizon.
The latest AI risk
Microsoft (NASDAQ:MSFT), Amazon and Alphabet have been spending big on data centres. And for a while, the question was whether this would actually generate any returns.
For the time being, that seems to have been answered – all three have reported strong growth in cloud computing revenues. But the new concern is where this is coming from.
Microsoft recently revealed that OpenAI now accounts for roughly 70% of its AI revenue and around 45% of its commercial backlog. That brings customer concentration risk on an epic scale.
In other cases, Anthropic is thought to be doing a lot of the heavy lifting. But the overall picture’s clear – growth is coming from two companies and not much else.
Why this matters
This matters because both OpenAI and Anthropic are under pressure. In particular, they’re facing a couple of major structural problems.
The biggest issue is cost. Most AI use doesn’t need the leading model – something good enough at the lowest price will do – but Western labs are at a major cost disadvantage, partly due to higher energy prices.
In cases where cutting-edge products are important, staying at the front is expensive and difficult. The identity of the leading model seems to change almost every week.
If OpenAI and Anthropic can’t maintain a sustainable advantage, their ability to keep signing giant compute agreements could shrink. And that could impact future returns from AI investments.
Microsoft’s hedge
Microsoft appears to be acutely aware of this risk. It’s looking to position itself as a platform that routes queries across different models, rather than committing to one.
The immediate danger is that this might put pressure on the one customer driving Azure growth. And the fact it’s a major shareholder in OpenAI is also worth noting.
Satya Nadella however, seems to think this is the right strategy for the longer term. To my mind, it makes a lot of sense – and he usually tends to know what he’s doing.
If Microsoft can pivot into a model-neutral interface between users and LLMs, it could be in a very nice position. But I don’t think this is a strategy that can work for every company in the AI ecosystem.
Bottom line
AI has been the major force driving prices higher in the stock market. And so far, pretty much every company in the supply chain has benefited.
