The Generative AI Playbook—Winners, Losers, and Finding the Edge

In the cutthroat world of finance, the edge isn’t just about having access to information; it’s about interpreting that information better than anyone else. Right now, everyone’s talking about generative AI like it’s the second coming of the internet, and in many ways, they’re right. But here’s the thing—while the masses scramble to buy into the narrative, you and I are looking for the cracks in it.

2024 has been a year defined by the relentless march of AI and tech stocks. The AI narrative has driven much of the bull market this year, with investors piling into anything remotely connected to the space. Companies that have leaned into AI have seen their valuations soar, often disconnected from their actual business fundamentals. This market euphoria is reminiscent of the dot-com boom, where everyone was throwing money at anything with a ".com" in its name. But we know how that story ended—some companies thrived, but many more crashed and burned. The trick is finding out which is which before the market catches on.

The AI Gold Rush: Who’s Really Winning?

Generative AI is the shiny new toy that everyone wants to play with, but not every company that picks it up knows what they’re doing. It’s like the dot-com boom all over again—some companies are riding the wave because they’re genuinely innovating, while others are just slapping “AI” onto their branding and hoping for the best.

The winners here are the companies that have figured out how to make AI a core part of their business strategy—not just a marketing ploy. Think of it this way: building vs. buying. The real players are those who’ve invested in building out their AI capabilities from the ground up, integrating it deeply into their operations to drive efficiency, innovation, and revenue. Companies like NVIDIA and Microsoft are prime examples. NVIDIA’s GPUs are the backbone of AI computation, and their CUDA platform has become the de facto standard for AI development. Microsoft, with its Azure cloud platform and AI services, isn’t just selling AI tools—they’re embedding them into everything they do, from enterprise solutions to consumer products.

On the other side of the coin, you have the companies that are buying into AI without a clear strategy. They’re spending big to stay relevant, but there’s a disconnect between their AI investments and their core business. These are the ones to be wary of. Retailers and traditional automakers are perfect examples—they’re throwing money at AI to automate processes or enhance customer experiences, but these investments aren’t moving the needle in any meaningful way. The result? Wasted capital and, eventually, a hard reckoning when the AI hype settles down.

The Buy-In Dilemma: Spending to Stay Relevant

Then there’s the crowd that feels the pressure to get into the AI game because everyone else is doing it. They’re spending big—either acquiring AI startups or pouring money into AI R&D—but here’s the problem: AI isn’t their core competency. For these companies, AI is a shiny object, not a foundational tool.

Take IBM, for example. They’ve been touting their AI capabilities for years, but the reality is that they’ve struggled to translate these capabilities into significant growth. Their AI investments are more about keeping up appearances than driving core business value.

The same goes for some financial institutions. They’re investing in AI to enhance their trading algorithms or customer service bots, but for many, it’s more about staying in the conversation than creating real competitive advantage. The ones that figure out how to leverage AI for true differentiation will come out on top, but the rest are just burning cash.

Finding the Edge: Correlation with Core Business

The key to separating the winners from the losers is to look for correlation—specifically, the correlation between a company’s AI investments and their core business performance. Amazon is a textbook example of this. Their AI investments aren’t just for show; they’re directly tied to their logistics, retail, and cloud businesses. AI is driving efficiencies in their warehouses, enhancing the customer experience on their e-commerce platform, and powering AWS services that generate billions in revenue.

Similarly, companies like Google (Alphabet) and Apple are using AI to enhance their core products and services. For Google, AI is embedded into search, advertising, and cloud services—core areas that directly impact their bottom line. Apple, meanwhile, is using AI to improve everything from device performance to user privacy, which strengthens their product ecosystem and, by extension, their market position.

But let’s dig a little deeper—into the logistical side of things. AI isn’t just a front-facing innovation; it’s revolutionizing the backend infrastructure that keeps the tech world spinning. Data centers are ground zero for AI processing, with massive investments in AI-optimized hardware driving the next wave of computing power. Companies like Equinix and Digital Realty are quietly profiting as demand for high-performance, AI-ready data centers skyrockets.

Then there’s cloud computing. As AI workloads increase, so does the need for scalable, flexible cloud solutions. Amazon Web Services (AWS), Microsoft Azure, and Google Cloud are the big players here, and they’re not just selling space—they’re offering specialized AI services that attract the next generation of tech innovators. This isn’t just about capacity; it’s about offering the right tools to unlock AI’s potential.

And let’s not forget cybersecurity. As AI becomes more pervasive, the attack surfaces for cyber threats expand. Companies like CrowdStrike and Palo Alto Networks are doubling down on AI to stay ahead of increasingly sophisticated threats. These investments aren’t just defensive—they’re integral to maintaining trust in a tech-driven economy.

Stay Sharp, Stay Selective

As we navigate the AI boom, the edge lies in being selective. Don’t get caught up in the hype. Look for companies where AI isn’t just a buzzword but a real driver of growth. Watch for those who are overextending themselves, chasing the AI dream without a clear path to ROI. The market will eventually separate the real innovators from the pretenders, and when that happens, you’ll want to be on the right side of the trade.

Remember, in this game, it’s not about being first—it’s about being right.

TL; DR - 2024 has seen a bull market fueled by AI hype, but not all companies investing in AI will come out as winners. The real edge lies in identifying firms where AI investments are deeply integrated into their core business, driving growth and efficiency. Companies like NVIDIA, Microsoft, Amazon, and Google are leading the way by embedding AI into their operations, while others are spending big on AI without a clear strategy, risking wasted capital. Beyond the obvious, AI is also revolutionizing logistics, cloud computing, and cybersecurity, creating new opportunities for savvy investors. Stay sharp, stay selective—focus on where AI is making a real impact, not just a splash.

Book recommendation

I recently started reading Black Edge by Sheelah Kolhatkar which documents the rise and fall of Steve Cohen’s SAC Capital. It’s an incredibly interesting tale of insider trading and the golden age of hedge funds for anyone interested in an intersection of crime journalism and global finance.

What I’m interested in this week

1. “JPMorgan Gives Staff AI-Powered ‘Research Analyst’ Chatbot” - in Bloomberg

2. “Breakthrough CRAM device makes AI 1000x more energy efficient” in Interesting Engineering

   1. To read the original research paper, you can find it HERE

3. “HEDGE FLOW Hedge funds ditch bearish Europe bets at fastest pace in a decade, Goldman says” in Reuters