Tim Hoyle, Chief Investment Officer
thoyle@haverfordquality.com

The Hype Cycle

The hype in Artificial Intelligence (AI), what many say, is a modern-day gold rush, is amassing trillions of dollars of investment A recent UN Trade and Development (UNCTAD) report projects the global AI market will grow from $189 billion in 2023 to $4.8 trillion by 2033;massive gains and insatiable demand is being seen in all corners of the industry.

• Amazon CEO, Jeff Bezos, recently said, “Amazon Web Services (AWS) still has more demand than capacity” with an increase in backlogs of 25% year-over-year.
• All of the largest hyperscalers, including AWS, Microsoft and Google continue to expand investments in their data centers.
• Google DeepMind CEO, Demis Hassabis, recently posted on X that Google’s Gemini processed 1 quadrillion (1,000 trillion) tokens in June which is double the amount from May and an increase from only 10 trillion tokens per month in mid-2024. A token is a unit of text that the model processes, such as a word, part of a word or even a punctuation mark

Should you believe the hype, or use it as an investing benchmark? Let’s first look at what has come to be known as the Gartner Hype Cycle. In 1995, a Gartner research analyst, Jacki Fenn, commented on a commonly seen pattern in technology spawning this still relevant graphic. Fenn noted that new and promising technologies tend to experience highly inflated expectations beyond current capabilities, leading to a tipping point and sliding into disillusionment before adding significantly to productivity.

Haverford believes AI is too broad a concept to place at one specific point on the Gartner Hype Scale. From a common use perspective, consumers have broadly adapted the technology to help with everything from cocktail recipes to vacation planning and as a next generation search engine. Meanwhile many enterprise users may still be struggling to find use cases that provide a return on their investment and promised productivity gains. Overall, we believe we are within the “On the Rise” sector of the Gartner Hype Scale as AI technology’s promise continues to grow.

Knowing the Hype Cycle exists, investors expect that at some future point markets are likely to experience a trough of AI disillusionment. However, the technology’s potential continues to grow, so we may witness a steeper version of this cycle than illustrated. AI is adding value and bringing disruption to many industries with new use cases appearing every day.

As AI continues its ascent on the Hype Cycle, Haverford is focused on fundamentals over frenzy. While the sector is booming, we know that not all AI stocks will deliver lasting value. As always, a disciplined approach will be key: assessing cash flow generation, competitive positioning, and capital discipline. We don’t want to chase hot trends, but we see value when paying for sustainable growth.

So, should you believe the hype? Our counsel is that long-term success lies in thoughtful allocation and quality selection.