Why AI technology 'went rogue'

**Vishalad Sripathma** (0:01)
Is Big Tech's billion-dollar AI bet paying off?

**SPEAKER_2** (0:04)
I think it's pretty surprising that the market is ignoring a lot of the issues right now.

**Vishalad Sripathma** (0:09)
It's World Business Report from the BBC World Service.
I'm Vishalad Sripathma. On the way, Alphabet beats Tesla misses. We'll ask whether Big Tech's billion-dollar bet on AI is finally starting to pay off or not. Also, an OpenAI model broke out of its sandbox and hacked another AI company. And it's turning out to be a rather hairy problem for Japanese office workers now that men are being allowed to swap their suits for shorts.
So we've had a busy evening for markets with results from Google parent Alphabet and electric car maker Tesla. Alphabet beat revenue expectations, offering some reassurance to investors, backing the billions of dollars they're pouring into AI. Tesla, meanwhile, disappointed, missing expectations as it continues to navigate a rather tough period for its core car business. So a mixed bag. Alphabet CEO, Sundar Pichai, quite keen to reassure investors that the money being spent on data centres and chips are all worth it. Well, Susan Schmidt, portfolio manager at Exchange Capital Resources in Chicago, is our market's guest today. Hi, Susan.

**Susan Schmidt** (1:27)
Hello.

**Vishalad Sripathma** (1:27)
Susan, welcome. So Alphabet, firstly, did well there to beat expectations, did they?

**Susan Schmidt** (1:34)
Alphabet did, I think, very well. It wasn't a blowout quarter. I think this was right down the middle and it will satisfy investors. They were very practical, I think, in laying out the business. They showed great growth in their cloud business, which has very high margins, so investors will be comforted by that. They also had normal, and I think, met expected returns for revenue on their other businesses, such as Search. And then we saw that the one thing investors can point to that they're going to be nervous about potentially is increasing expense, more spend on AI.
And so that went up. That's one number that the CEO did say is going up. They've not excessively, but from $190 billion to $205 billion. So we're still talking really large numbers. It's going to give investors something to talk about. This spend towards AI just keeps going.

**Vishalad Sripathma** (2:29)
Really big numbers there. And we'll be talking about that a little bit later on. I just want to mention Tesla as well here. So Tesla's stock down a fair bit, more to do with the electric vehicle market.

**Susan Schmidt** (2:41)
Exactly. So Tesla having problems, they're at the moment of a, I would say, a switch in business model, potentially with comments from their leader, Elon Musk, talking more about robotics and his robotaxi business, less about the vehicles. The vehicles actually are still the bulk of the earnings and the revenues, not doing so well this quarter. And where they really lost it was not on the sales. They were slightly higher in their sales year over year, but operating margins and profitability was down. So disappointing the street there. Also spending, again, a lot of cash on infrastructure, also related to AI, related to this robotics development, and then negative a billion in their cash flow. So investors are going to pick that apart quite aggressively.

**Vishalad Sripathma** (3:30)
So are markets then starting to demand rather clear evidence now for returns?

**Susan Schmidt** (3:38)
Investors are still on the fence as to whether this spend is warranted or not. And I think that you're seeing the risk-on, risk-off behavior. Risk-on, I'm going to take a position in the market. Risk-off, I might sell the stock and step to the side. We see that back and forth in the volatility that we're seeing in these AI-related names.
These reports will have investors thinking about it. Next week, we're going to see reports from Microsoft, Metta, Apple and Amazon. That's going to cause a lot more conversation about the spend in AI. And investors will continue to press managements to see when they will start seeing some sort of return.

**Vishalad Sripathma** (4:18)
OK, Susan, let's pause for now on the results. So something that is being asked a lot is whether all this money is being spent wisely, which Susan alluded to there. Google burned through nearly $6 billion in cash last quarter as AI spending surged, which feels like a lot of money. Well, Ruth Foxblader is an investor in tech and joins us now from New York. Hi, Ruth.

**Ruth Fox-Beyer** (4:41)
Hello.

**Vishalad Sripathma** (4:42)
Hello, and thank you for joining us. Ruth, it can sometimes feel as though every company wants to put AI in the shot window, just because it feels like a bit of a magnet.