AI ‘roadkill’ fears haunt traders two years after ChatGPT debut

By Jeran Wittenstein and Ryan Vlastelica

The rise of ChatGPT sparked fears about artificial intelligence roiling businesses of all kinds. Two years after the chatbot’s release, the results haven’t been nearly as cataclysmic as some investors predicted. But there’s still plenty of anxiety.

Earlier this month, Adobe Inc. shares plunged after giving a disappointing revenue forecast. The report rekindled worries that despite developing its own AI tools, the company is still at risk of losing business to startups like OpenAI and Runway AI. Shares of the maker of photo and video-editing software are now on pace for the worst month in over two years.

Adobe is the latest cautionary tale for investors even though the jury is still out on whether AI will prove to be a boon or bust for its business and others like it. For all of the angst, a view of the clear winners and losers remains murky.

“It is too soon to say whether a company can adapt to AI or be roadkill,” said Gil Luria, the head of technology research at D.A. Davidson. AI is the most disruptive technology since the internet, but its impact on the market will take more than 24 months to play out, Luria added.

Some companies that investors thought would be at risk have thrived. Take Duolingo Inc., the maker of language-learning software. Its shares have rallied more than 50 per cent this year despite facing stiffer competition from AI startups.

The company’s embrace of AI has helped lower costs and its expansion into other subjects such as math and music is attracting new customers.

Internet services companies like GoDaddy Inc. and Wix.com Ltd, which were labeled as potential AI losers, have also seen their shares soar. GoDaddy is up 93 per cent while Wix.com has gained 80 per cent. Pearson, another education-company that was seen as being in ChatGPT’s crosshairs early on, saw its shares hit the highest level since 2015 this month.

There are, of course, plenty of other companies that haven’t done as well. A Goldman Sachs basket of stocks believed to face heightened risks from AI has gained 21 per cent since the end of 2022, compared with a 55 per cent gain for the S&P 500 Index.

Credit: Bloomberg

The dislocation between expectations around AI and how things have actually panned out underscores the uncertainty around the technology and the difficulty in predicting how it will shape markets and the economy. While tech giants like Microsoft Corp. continue to spend heavily on AI, the services still aren’t being widely used and it has taken longer than many expected to generate comparable AI-related revenue.

To be sure, there are some companies that have clearly been hurt by AI. Chegg Inc., the online-education company, has lost more than 90 per cent of its value since the end of 2022. Its revenue contraction has accelerated in each of the past two quarters and management has blamed headwinds from generative AI services.

Chegg is “under major duress” from AI, Jefferies analyst Brent Thill wrote in a research note after the company’s November earnings report. Of the 12 analysts tracked by Bloomberg that cover Chegg, none recommend buying the stock.

The online review site Yelp Inc. has dropped 20 per cent this year. Analysts have warned that AI could be a risk to long-term growth, though Yelp has announced a partnership with Perplexity AI.

“It is too soon to classify anyone as a loser, but over the long term, the real losers will be the companies that started to invest too late and have to try and play catchup,” said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management.

For stock pickers, the risks are top of mind. Michael Bailey, director of research at Fulton Breakefield Broenniman LLC, said his firm sold shares in Accenture in October based on the belief that AI will be a net negative for its business of IT outsourcing and consulting as more companies seek to automate work tasks.

The stock rallied on Thursday after Accenture raised its revenue forecast for the year and noted strong demand from clients for its generative AI services.

The earnings report showed that Accenture is getting some lift from AI, but it is still likely to remain a relative underperformer, Bailey said.

Companies “are going to use these tools and try to compete and it’s going to be tough to see,” Bailey said.

In the absence of a clear view of who the long-term winners and losers are going to be, it’s wise to remain diversified with a bias toward larger companies that have the capital required for costly AI investments, according to David Kotok, chief investment officer at Cumberland Advisors.

“AI is only going to intensify, so the divide between rich and poor companies will only grow,” Kotok said. “We will eventually have some losers, but I don’t know that I’m surprised we haven’t seen many yet. We may not know for years.”