The AI Adoption Cycle
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Tech stocks have been volatile this week, but in order to understand the price action, we must understand where we are in the AI cycle. The buildout phase, and its exuberant extrapolation, is over. We now enter the adoption phase as companies expand their AI spending to drive efficiencies in operations. The pace of adoption limits the pace of the buildout, which is why infrastructure assumptions have been pared back.
We previously wrote about AI replacing workers and forcing layoffs. This is bad news for the labor market, but good news for the AI trend because it means AI is delivering on its promised use cases. Key insight: There is a lot of friction to firing employees (severance costs and restructuring) which puts a natural limit on the pace of adoption.
We now have 17% of companies using AI in their regular business functions; expected to rise to 21% in the near future.
In particular, adoption is highest in white collar and desk jobs — somewhat obvious, since AI is yet to replace physical labor (need robotics for that, which is the next phase). Adoption is generally higher in larger firms that can afford to spend the money. Many companies are already reporting positive return-on-investment of AI usage.
The takeaway? Investors initially overestimated AI’s market potential as pie-in-the-sky projections were being thrown about. As the true market size emerged, we now have a better idea of the revenue potential. And since the reality of corporate adoption rates is a limiting factor, growth forecasts must now be corrected, for Nvidia and everyone else. But this isn’t the end of the road for AI; it’s just a speed limit.
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