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Market Pulse
Saturday, April 13, 2024

Trouble brewing in AI paradise, Google having a ‘Game of Thrones’ moment and interest rates might just stay higher for longer

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our stories this week are:

  1. Trouble brewing in AI paradise
  2. Google: Having a ‘Game of Thrones’ moment
  3. An interest rate rollercoaster

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Trouble brewing in AI paradise

Stability AI, the UK based AI startup behind the popular image generator Stable Diffusion, was an AI darling not too long ago. But they are currently facing severe financial difficulties and seem to be struggling to find a viable business model. After a wave of departures of senior executives and researchers, and calls from a key investor, the CEO, Emad Mostaque, recently resigned[1]

In 2022 Stability AI raised over $100mn and reached a valuation of $1bn, unicorn status. It even drew the attention of Intel, who invested close to $50mn. But training AI models is notoriously expensive. According to Forbes, Stability AI spent close to $100mn on compute in 2023. This is a big number, especially as it excludes other significant business costs like rent and salaries. According to the company, their AWS computing resources are comparable to one of the world's 10 largest supercomputers[2]

Given the financial strain, Stability AI is looking for other ways to bring in some much needed funds. According to media reports, one of their plans is to resell compute resources, including their Nvidia A100 chip clusters on lease from Coreweave, as a managed service offering. They expect this could bring in more than $100mn in additional revenues in 2024. 

Events at Stability AI potentially point to potential trouble on the horison. If more AI unicorns run into trouble down the line, it could severely dent demand for high end GPUs, impacting companies like Nvidia, AMD and Intel. If some of these startups follow Stability AIs playbook and resell their compute resources, it could disrupt supply and demand in the cloud computing market and by extension existing players like AWS, Azure and Google. We’re keeping a close eye on developments. 

Note: We own Nvidia, Intel, Amazon, Microsoft and Alphabet in our Flagship Strategy.

2) Google: Having a ‘Game of Thrones’ moment

Previously we’ve written about Google and how its push into Generative AI has hit a few rough patches. Recently current and former Google Execs revealed what they believe part of the problem might be. Product innovation at Google is being slowed down by cultural and organisational dysfunction that has split the business into competing factions, Game of Thrones style. 

These insiders say that Google no longer operates like a nimble high-tech innovator. Big company inertia, and the lack of a strong vision for rolling out generative AI across its range of products, has slowed down their AI efforts. They also talk about a divide between two key product areas. On the one hand there is the new AI team, led by Demis Hassabis, who are trying to create and launch new products and on the other hand there is the traditional ads business, trying to protect revenues and profitability from disruption by AI[3]

Current CEO, Sundar Pichai, is understandably in a difficult position. He has traditionally employed a low key leadership approach, with a preference to manage teams by consensus. But there are those that feel this is not what Google needs right now. They say Google needs much more assertive ‘wartime leadership’ to adapt to disruptive change and speed up execution under pressure. Sundar Pichai himself admitted Google’s size has created challenges. He said that their current scale makes it difficult to move fast and maintain a culture of risk taking and experimentation.

But there are encouraging signs that things are changing. Sundar Pichai has stepped up and now makes many of the day to day decisions that relate to AI products. One employee said he is the de facto ‘chief product officer for AI’. He also appointed Elizabeth Read, who previously worked on generative AI search experience, as the head of the entire Google search division. These seem like decisive steps towards a more nimble Google that can experiment, take risks and compete more effectively in the fast moving AI landscape[4]

Note: We own Alphabet in our Flagship Strategy.

3) An interest rate rollercoaster

Recent US inflation data potentially threw a spanner in the works for rate cuts in 2024. This is now the third consecutive month that US inflation came in hotter than expected and this has big potential implications. 

Over the course of the last 3 months, the market has been winding back their expectations on the number of rate cuts we might see, both in the US and here in the UK. After the recent bad news on inflation, they dialled back their expectations even more. Some commentators are even seeing a possibility of no rate cuts in 2024[5]

It’s not just the inflation numbers that are causing investors to rethink their 2024 outlook. Tensions in the Middle-East are escalating. US intelligence reports suggest it's a matter of when, not if, Iran launches a direct attack on Israel. The oil price is already up almost 25% since late last year and higher commodity prices won’t help in the fight against inflation[6]

Stubborn inflation can have other consequences too. Republicans in the US were quick to blame higher inflation on current president Joe Biden's policies. While recent polls suggest the race between president Joe Biden and former president Donald Trump are tied, this could quickly change if inflation keeps going the wrong way, potentially increasing the chances of another Donald Trump presidency. The stakes are high and we are keeping a close eye on developments[7]


[1] https://www.bloomberg.com/news/articles/2024-03-26/stability-ai-ceo-emad-mostaque-resignation-what-happened 

[2] https://www.forbes.com/sites/kenrickcai/2024/03/29/how-stability-ais-founder-tanked-his-billion-dollar-startup/?sh=42c1d7143e63 

[3] https://www.ft.com/content/4dfc113f-ccbe-4d11-82b5-761c77fbda24 

[4] https://www.theverge.com/2024/3/19/24105705/google-liz-reid-search-ai-sge-gemini 

[5] https://www.ft.com/content/0395f49d-ac44-4698-afc2-d4784204cf41 

[6] https://www.ft.com/content/015ceea7-d324-46cf-8d72-8b1864885260 

[7] https://www.ft.com/content/d8520a33-f202-4679-b6f7-99fe9e4fb3ae 


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