The launch of ChatGPT in late 2022 ushered in a new era of technological innovation that few people could have imagined. As the tool grew stronger, reportedly reaching 100 million users within about two months of its launch, Wall Street applauded the generative AI, viewing its debut as akin to the launch of the iPhone in 2007. At first glance, companies like Alphabet and Microsoft seemed Standing by to take advantage of AI, while chipmakers creating tools that support large language models have seen inventory surge. Nvidia’s quarterly print this week reinforced the case for investing in artificial intelligence. GOOGL MSFT YTD Mountain Alphabet vs Microsoft So far this year Wall Street is just beginning to recognize the investment potential of the big winners in AI, with Goldman Sachs predicting the technology could generate $7 trillion in global economic growth over the next 10 years. But not every sector will benefit equally, and a nearly 50% sell-off in online education provider Chegg in the wake of its quarterly earnings earlier this month highlighted the downside risks to AI and the challenge it poses in some industries. Interest in ChatGPT has soared among students, Chegg CEO Dan Rosensweg said on a conference call earlier this month, a move the company believes affects new customer growth rates. Chegg seemed like the first soldier to fall into the growing AI war, forcing Wall Street and the investment community to reconsider the downsides of this seemingly flawless technology and how it might jeopardize long-standing business models and profitable revenue streams. CHGG stock 1M Mountain Chegg over the past month. The thinking now is that no part of the economy can hide from AI. Companies from manufacturers to well-known retailers are starting to embrace technology to improve their products. But some companies face more risks than others, and severe challenges to overcome. AI-powered chatbots in the freelance market that are capable of creating content pose significant risks to the freelancing market as bots improve, with the potential to replace the need for services that connect job seekers like Fiverr and Upwork. RBC Capital Markets analyst Brad Erickson highlighted in a recent note that AI can in fact lift these companies up in the long run and improve productivity, but said AI concerns will likely weigh on stocks in the near term. “We generally agree with management’s comments about how AI will actually stimulate demand versus potentially supplanting it, but given the activity and innovation going on in the space, this seems to be a constant for the foreseeable future which makes multiple expansion seem unlikely, in our view.” while lowering his price targets on the stock. During its earnings call earlier this month, Upwork highlighted ways it’s harnessing artificial intelligence to improve its platform. CEO Hayden Brown responded to analyst concerns about artificial intelligence and its implications for the freelance company, pointing to new developments at Upwork and why AI creates a “tremendous opportunity” for the company. “I would just like to stress that we don’t see any negative effects from AI today,” Brown said. “And as we look across the work that’s happening in the platform, some of the most exciting things we’re seeing are in pretty much every category that we serve, as talent is using AI tools to augment workflow.” In the freelancing sector, BTIG said the effects of AI will vary by field. A survey conducted by the company showed that these tools could boost demand in areas such as machine learning and engineering, while hurting writing, design, and customer service functions. UPWK Mountain Upwork shares year-to-date in education services After Chegg’s sales in early May highlighted the detrimental effects that ChatGPT poses to some business models, many Wall Street analysts saw education services as particularly vulnerable to disruption. With Chegg at risk of losing its AI homework help solution, education publisher Pearson is vulnerable to disruption from AI if some students swap out textbooks or e-books for homework helpers, including ChatGPT, equity research firm Redburn said. . Redburn noted that many students choose cheaper alternatives to course materials and seem less concerned about privacy or ethical issues. Meanwhile, restrictions in applicable copyright rules make it easier to train AI tools. However, Redburn said, accuracy issues with AI tools could bolster Pearson’s use case. Some tools for discovering AI-generated answers are also in development. Wall Street is turning bullish on Pearson in the wake of an earlier sell-off, as Bank of America recently upgraded the stock to a buy rating. Morgan Stanley moved the stock to a plus rating, saying that generative AI could improve the company’s value. With turbulence concerns still in place, UBS expects more volatility in the sector in the near future, although in the long run these companies should benefit from incorporating new tools into their offering. “Increased productivity and technological advancement should benefit education technology offerings in the long term, but there may be temporary disruptions or headwinds from new competition as companies build their AI capabilities,” UBS said in a recent note. PSO 1M Mountain Pearson stock performance over the past month As the use of AI grows, Wall Street also sees it as a tool teachers can harness to teach new subjects and identify students lagging behind in coursework, while providing necessary improvement tools, Jefferies analyst Brent Thiel wrote in a recent note. Online course platform Udemy is another stock of education technologies at risk from the rise of AI, Thill said, noting that consumers may turn to AI rather than its website to learn new tasks. At the same time, it can benefit consumers looking to improve their skills and create better content. Music Industry Music labels that rely on exorbitant royalty fees and copyright protection may face some major headwinds as artificial intelligence booms. In the distant future, music streaming companies like Spotify could harness independent music created with AI tools to cut costs by generating the next pop sensation themselves, Credit Suisse’s Douglas Michelson wrote in a recent note. WMG YTD Mountain Warner Music Group’s stock in 2023 would enable AI-generated songwriters to forgo the hefty royalty fees that stem from their current reliance on new content, potentially undoing an essential industry-wide practice. For major studios and labels like Warner Music Group and Universal Music Group, this means a reversal of a lucrative revenue stream used for decades, Rosenblatt analyst Barton Crockett noted. Copyright issues are another major hurdle for music companies. Copyright laws and how they apply to AI are not clear in most countries, Redburn said in a recent note, and some officials are even looking to relax protections to boost innovation. Analysts said that some of the potential copyright violations include cloning the artist’s image or sound, and that could dilute the value of the catalog to many music companies. However, charging AI tools to use their materials could lead to another lucrative revenue stream for music companies, Morgan Stanley’s Omar Shaikh wrote in a recent note to clients. Web Builders Many small and medium-sized businesses rely on website builders to easily create and enhance their online presence. But emerging AI tools may eventually replace some of the simple website design features that these companies specialize in. Despite those concerns, other analysts see website builders including GoDaddy, Wix, and Squarespace benefiting from AI, with Citi analyst Ygal Arounian recently seeing their distressed stock as a buying opportunity. WIX YTD Mountain Shares Performance This Year “Artificial intelligence can democratize web-building capabilities and put more control in the hands of the user, because it is now easier to build a website without professional help,” he says. “But for the majority of web designers, building a site doesn’t stop there, it involves running a business and maintaining it regularly.” Despite the near-term concerns, Bank of America analyst Nat Schindler sees Wix as particularly well positioned to weather this volatility. “In our opinion, AI is unlikely to be a significant threat to Wix due to the lack of integration and customization,” he said in a recent note. Wix benefits from more than [a] A decade of optimization and a wide range of builder tools that simplify the process. Customer Service and Call Centers AI tools capable of replicating human agents are another hurdle for call centers or customer service firms that use live agents to respond to customers. AI could cause problems for Five9, a provider of cloud software solutions used to engage customers , by reducing demand for call centers.Nice is another company at risk, with Jefferies’ Thill mentioning in a recent report that it and Five9 are among the names most at risk from artificial intelligence. If AI tools are capable of handling simple customer interactions, NICE recently highlighted that companies require live agents to handle more complex needs.” Matthew Nicknam, an analyst at Deutsche Bank, said in a recent note that AI presents more opportunities than risks and offers “not “Tailwind upside down” for Five9 is well appreciated. FIVN 1M mountain Five9 stocks over the past month Morgan Stanley analyst Meta Marshall notes that speaking to a direct agent is still important for companies and clients alike. Five9 is “aggressive in combat,” Marshall said in a recent note [the] Narrative that artificial intelligence is considered negative for [Contact-Center-as-a-Service]instead highlighting it as an opportunity.” — CNBC’s Michael Blum contributed reporting
