How artificial intelligence could threaten major industries and business models
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The launch of ChatGPT in late 2022 ushered in a new era of technological innovation that few people ever imagined. As the tool gained steam, reportedly hitting 100 million users within about two months of its launch, Wall Street lauded the generative artificial intelligence, viewing its debut as akin to the iPhone's launch in 2007. At first glance, companies like Alphabet and Microsoft seemed poised to capitalize on AI, while chipmakers creating the tools underpinning large language models experienced jaw-dropping stock surges. Nvidia 's blowout quarterly print this week only boosted the investment case for AI. GOOGL MSFT YTD mountain Alphabet and Microsoft so far this year Wall Street is just beginning to discern the investment potential of the big AI winners, with Goldman Sachs forecasting the technology as capable of generating $7 trillion in global economic growth over the next 10 years. But not every sector will benefit equally, and the nearly 50% selloff in online education provider Chegg on the heels of its quarterly earnings earlier this month illuminated the downside risk to AI and challenge it poses in some industries. Chegg CEO Dan Rosensweig said on a conference call earlier this month that interest in ChatGPT surged among students, a move the company believes is weighing on its new customer growth rates. Chegg looked like the first soldier to fall in the growing AI war, forcing Wall Street and the investing community to reconsider the downsides to this seemingly faultless technology and how it may jeopardize longstanding business models and lucrative revenue streams. CHGG 1M mountain Chegg shares over the last month The thinking now is that no part of the economy can hide from AI. Companies from manufacturers to popular retailers have begun embracing the technology to improve their products. But some companies face more danger than others, and steep challenges to overcome. Freelance market AI chatbots capable of generating content pose significant risks to the freelancing market as the bots improve, with the potential to replace the need for services connecting jobseekers such as Fiverr and Upwork . RBC Capital Markets analyst Brad Erickson highlighted in a recent note that AI could in fact lift these companies over the long haul and improve productivity, but argued AI concerns will likely pressure shares in the near term. "We generally agree with management's comments on how AI is actually driving demand vs. more likely to displace it, but given the activity & innovation going on in the space, this seems likely to be the immovable object for the foreseeable future which makes multiple expansion look unlikely, in our view," he said, while lowering his price targets on the shares. During an earnings call earlier this month, Upwork highlighted the ways it's harnessing AI to improve its platform. CEO Hayden Brown responded to analyst concerns about AI and its implications for the freelancing company, noting new developments at Upwork and why AI creates an "enormous opening" for the company. "I would just underscore we're not seeing any negative impacts from AI today," Brown said. "And, as we look across the work that's happening in the platform, some of the more interesting things we see is in pretty much every category we serve, talent are using AI tools to augment their workflows." Within the freelancing sector, BTIG said the impacts from AI will differ by field. These tools could potentially boost demand in areas like machine learning and engineering, while hurting writing, designing and customer service jobs, a survey conducted by the firm showed. UPWK YTD mountain Upwork shares year to date Education services After Chegg's early-May selloff shined a light on the harmful effects ChatGPT poses to some business models, many Wall Street analysts viewed education services at special risk of disruption. As Chegg is at risk of losing its homework help solution to AI, educational publisher Pearson is vulnerable to disruption from AI if some students swap textbooks or eBooks for homework-helping tools, including ChatGPT, said equity research firm Redburn. Many students, Redburn noted, opt for cheaper alternatives to course materials and seem less "concerned by privacy or ethical issues." Meanwhile, limits on applicable copyright rules make it simpler to train AI tools. Nevertheless, accuracy issues with AI tools, Redburn said, could boost the use case for Pearson. Some tools to detect AI-generated answers are also under development. Wall Street is turning more bullish on Pearson in the wake of an earlier selloff, with Bank of America recently upgrading the stock to a buy rating. Morgan Stanley moved the shares to an overweight rating , saying that generative AI can improve the company's value. As disruption concerns linger, UBS expects more volatility in the sector in the near future, although these companies should benefit longer-term from integrating new tools into their offerings. "Greater productivity and technological advancement should benefit edtech offerings over the longer term, but there may be temporary dislocations or headwinds caused by new competition as companies build out their AI capabilities," UBS said in a recent note. PSO 1M mountain Pearson's stock performance over the last month As the use of AI grows, Wall Street also views it as a tool that teachers can harness to teach new topics and identify students falling behind in coursework, while also providing the necessary improvement tools, Jefferies analyst Brent Thill wrote in a recent note. Online course platform Udemy is another education technology stock 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 could benefit consumers looking to improve their skills and create better content. Music Industry Music labels reliant on steep royalty fees and copyright protections may face some major headwinds as AI blossoms. In a distant future, music streaming companies like Spotify could harness independent music created using AI tools to cut costs by generating the next pop sensation themselves, Credit Suisse's Douglas Mitchelson wrote in a recent note. WMG YTD mountain Warner Music Group's stock in 2023 AI-generated songs would also enable streamers to forgo hefty royalty fees that stem from their current dependence on new content, potentially undoing a foundational industry-wide practice. For major studios and labels like Warner Music Group and Universal Music Group , that means the reversal of a lucrative revenue resource used for decades, noted Rosenblatt analyst Barton Crockett. Copyright issues are another major obstacle for music companies. Copyright laws and how they apply to AI are unclear in most countries, with some officials even looking to ease protections to foster innovation, Redburn said in a recent note. Some potential copyright violations include replicating an artist's likeness or voice, and that could weaken the catalog value for many music companies, analysts said. Charging AI tools for using their material could, however, create another potentially lucrative revenue stream for music companies, wrote Morgan Stanley's Omar Sheikh in a recent note to clients. Web builders Many small- and medium-sized companies depend on website builders to easily create and promote their online presence. But emerging AI tools may eventually replace some simple website design features these companies specialize in. Despite such fears, other analysts view website builders including GoDaddy , Wix and Squarespace as beneficiaries of AI, with Citi analyst Ygal Arounian recently viewing their struggling shares as a buying opportunity. WIX YTD mountain Shares performance this year "AI can democratize web building capabilities putting more control in the user's hands, because it is now easier to build a website without professional help," he said. "But for the majority of web builds, creating a site doesn't stop there, and involves running a business and regularly maintaining it." Despite near-term concerns, Bank of America analyst Nat Schindler views Wix as especially well-positioned to weather this volatility. "In our view, AI is unlikely to present a significant threat to Wix due to the lack of integration and customizability" he said in a recent note."Wix benefits from more than [a] decade of optimization and an extensive suite of creator tools that simplify the process." Customer service and call centers AI tools able to replicate human agents present another obstacle for call centers or customer service companies typically using live agents to answer customers. AI could spell trouble for Five9 , a provider of cloud software solutions used for customer engagement, by reducing demand for contact centers. Nice is another company at risk, with Jefferies' Thill saying in a recent report that it and Five9 are among the names most at risk from AI. While AI tools may be capable of handling simple customer interactions, Nice recently highlighted that companies require live agents to handle more complex needs, Oppenheimer analyst Timothy Horan said in a recent note. "NICE is poised best to execute on integrating AI, buoyed by its 20-plus years of labeled customer care data, position as market leader, strong balance sheet and weak competitors," he said. Similarly, Deutsche Bank analyst Matthew Niknam highlighted in a recent note that AI presents more opportunities than risks and offers "underappreciated upside tailwinds" for Five9. FIVN 1M mountain Five9 shares over the last month And Morgan Stanley analyst Meta Marshall noted that talking to a live agent remains important for companies and customers alike. Marshall said in a recent note that Five9 is "aggressive in fighting [the] narrative that AI is a negative for [Contact-Center-as-a-Service], instead highlighting it as an opportunity." — CNBC's Michael Bloom contributed reporting