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What’s The Right Level of AI Investment?

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Predictions for holiday spending so far this year have generally been optimistic, but there have been a lot of big question marks surrounding them. While consumers want to celebrate, they don’t have as much income for the holiday because of the economy. People are excited for gifting, but might be more interested in paring down the people on their shopping lists because of other obligations, including student loan repayment.

Now we’re actually in the holiday season, and so far, those who predicted more spending have been right. According to Adobe Analytics, consumers spent a record $9.8 billion online as they digested their turkey on Black Friday. Spending on the first official holiday shopping day was up 7.5% from 2022. The holiday shopping blitz hasn’t just been people on phones and computers, though. Shopper traffic to retail stores was up 2.1% on Black Friday. Consumers sought out traditional big Black Friday deals—Adobe Analytics indicated electronics, smart watches and TV and audio equipment sold well—as well as traditionally less expensive gifts like KidKraft swingsets and play sets, Barbie Fashionista dolls and Mini Brands replicas.

However, the gift-buying frenzy of Black Friday may be a bit deceptive. Adobe Analytics found a large increase in Buy Now Pay Later (BNPL) financing, in which consumers pay for items in installments. Online orders using this payment plan were up 72% in the week leading up to and including Black Friday, compared to 2022. While the shopper using a BNPL plan doesn’t often pay interest, it stretches out the payment, meaning that the obligation to pay is likely to last well beyond the holidays. This could mean that consumers are hedging their personal finances as inflation gradually moves downward. But it could also mean they might not be able to afford what they’re buying, and will deal with that in 2024.

ECONOMIC INDICATORS

Retail isn’t the only sector seeing optimism and growth. Major stock indexes have also had a great month, and things are on track for November to not only be the best month of the year, but also one of the best of the decade. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite have all posted large gains in November. Positive economic data—including the Federal Reserve leaving interest rates unchanged, inflation staying at a constant 3.2% rate for two months straight and a low unemployment rate—has helped influence investors. But companies have also performed well. Data from the London Stock Exchange Group showed more than 80% of S&P companies’ third-quarter earnings beat expectations, which is the highest rate in the last two years.

Bank of America strategists have projected the growth of this last month will continue into 2024, predicting the S&P 500 will close 2024 at an all-time peak of 5,000—about 500 points above where it is today. According to Bloomberg, the team, led by Savita Subramanian, is optimistic about U.S. equities next year because of “what the Fed has accomplished” and the fact that the market has “absorbed significant geopolitical shocks already.” Other analysts are also optimistic about 2024, but nobody else has projected record highs so far. Goldman Sachs analysts forecast the S&P to be close to 4,700 at the end of the year, while Morgan Stanley is looking for a 4,500 target—almost exactly where it is today.

VALUATIONS + FUNDING

Online fast fashion titan Shein confidentially filed to go public on the U.S. market, several sources reported. The company, which was founded in China and is now headquartered in Singapore, is targeting a $90 billion valuation. Shein is known for its quickly produced and hyper-trendy clothing items, which tend to be inexpensive and viewed as clothing that can be thrown away when styles change. According to Bloomberg data, Shein accounted for half of the fast fashion sales in the U.S. last November.

Shein, founded in 2008, has long been rumored to be targeting an IPO. The company has had its share of controversy, however. Sixteen state attorneys general asked the Securities and Exchange Commission earlier this year to block a Shein IPO until the company could prove it didn’t use forced labor, an accusation the company has faced since a Bloomberg test showed some of the cotton it used came from a region in China that has been banned for imports. Shein has denied using forced labor.

A Shein debut could bring a jolt of life to the IPO market, which has been quiet this year. Other well-known consumer-facing companies that have debuted on the exchange this year, including Instacart and Birkenstock, have seen disappointing returns so far. But would investors place more confidence in an Asia-based “throwaway fashion” company than one that makes reliable and comfortable sandals? Judging from Inditex, the Spanish parent company of fast fashion maker Zara, they very well could. Last week, Inditex shares hit an all-time high of €36.95, up 48% in 2023 alone.

LEGAL MATTERS

It was another rough week in the cryptocurrency world. Binance and its CEO Changpeng “CZ” Zhao pleaded guilty to charges including anti-money laundering and sanctions violations brought by the Department of Justice and agreed to pay a $4.3 billion fine. As part of the settlement, Zhao stepped down as CEO of the exchange and pleaded guilty to violating the Bank Secrecy Act, which requires financial institutions to guard against money laundering and terrorist financing. Investigators said that Binance failed to take actions to stop Hamas and other organizations deemed terrorist groups from operating on the platform.

However, this action doesn’t kill Binance—or Zhao’s fortune. Binance will continue to operate with longtime executive Richard Teng at the helm, and with an independent compliance monitor closely following its actions. While Zhao is no longer leading the company, he remains its majority shareholder, holding a 90% stake in the company. Zhao is personally responsible for a $50 million fine in this case (as well as another $150 million penalty to the Commodity Futures Trading Commission), but his holdings are still vast. Forbes estimates Zhao’s stake in Binance is currently worth $15 billion, making him remain the wealthiest person in crypto.

The turmoil at Binance helped another cryptocurrency exchange. Coinbase’s stock has jumped 18% since the news of Binance’s guilty plea last week. In a Monday interview with CNBC, Coinbase CEO Brian Armstrong said the crackdown on Binance is a way for the crypto industry to “turn the page…and hopefully close that chapter of history,” doubling down on his assertion last week that Coinbase “believe[s] in rule of law.”

Last week, the Justice Department also seized nearly $9 million worth of cryptocurrency Tether tokens they say were linked to an organization that exploited victims through “pig butchering” romance scams. Tether also froze about $225 million in tokens earlier this month in an investigation into an international human trafficking syndicate. It’s unclear if these two actions were related. Investigators say a group of scammers created fake relationships with people online, convincing them to send money to invest. The scammers fabricated investment gains, then took the money and vanished, quickly laundering the funds through cryptocurrency addresses and tokens. Tether didn’t respond to Forbes’ request for comment, but said in a press release last week it had assisted the Justice Department in an investigation.

NOTABLE EARNINGS

  • Silicon Valley chip titan Nvidia posted record profits and revenues for the second straight quarter. The company’s revenues for the most recent quarter were $18.1 billion—$1.9 billion above last quarter’s record $16.2 billion in revenue, and 206% above the same period in 2022. The company said it expects to hit $20 billion in its next quarter. Nvidia’s explosive growth is driven by AI, with the bulk of all the company’s revenues—$14.5 billion—coming from its AI-heavy datacenter unit.

OFF THE LEDGER

EXL’s Vivek Jetley On Making AI Investments

Nowadays, every company wants to use AI to improve its operations, increase efficiency and keep up with the competition. But how do you decide where the priorities for spending are? And where do you find the funds? I spoke with Vivek Jetley, executive vice president and head of analytics at management consulting company EXL, about how CFOs can work with their company’s tech leaders on AI. This conversation has been lightly edited for length and clarity.

AI is a huge buzzword for everyone in business now, but it’s actually been something the researchers and tech space has been working with for years. How do you talk about AI technology with business leaders who are excited about it, but don’t know much about it?

The challenge that’s associated with it, is when you’ve got such a massive unlock in terms of the number of conversations, you’re probably also going to go down the funnel [with] the number of those conversations that actually turn into something real. A number of those conversations ended up being just, ‘Tell me about what it is, what does it do.’ It’s more information exchange, and it’s up to us as practitioners to try and piece that together to say, ‘Here is what it means, but here is what it means for you, and here’s how you can take that into the next phase to test it out.’ The funnel has become very big at the top of the funnel. The number of conversations are off the charts. The conversion of those into meaningful use cases tends to be something that takes time. It’s definitely something that requires a tremendous amount of effort and a little bit of finesse in terms of how you take that big broad conversation and bring it down to saying, ‘Here’s what you can do to get to the next stage.’

Surveys have shown that companies all plan to put money into establishing and expanding generative AI in the next 12 months. As far as the actual list of IT and tech priorities go, where does generative AI actually sit?

A lot of our clients who are CIOs and CTOs have looked at generative AI saying, ‘It’s massive and the scope of this can be huge, but it’s just one more thing that I’m going to have to worry about in terms of the overall agenda.’ In an environment where funding was constrained, it’s created an additional thing [and leaders are] saying, ‘OK, I’ve got to fund that now, in addition to everything else that needed funding, and still fit it into my overall cost constraints.’ So it has led to a little bit of reprioritization.

Across the board, every single company that we know is doing something with regenerative AI: experimentation, and some of them are trying to get it into production at scale. But the priority that they’ve put to it tends to be different across different companies. I think for most of them, this is in addition to the existing priorities that the CIO and the CTO had, rather than a complete reconfiguration or a changing of the priorities. …The good thing is that it’s coming with funding. When you’ve got the board asking you questions, saying, ‘What are we doing with the AI agenda,’ that usually then opens up at least a little bit of funding for the CIO to say, ‘Here’s what I need to be able to do.’

We are looking at it right now as something that is getting funded across the board. The mechanism of the funding may vary. In certain cases, it’s linked to sales. In others, the company’s cutting costs elsewhere and making the funding available, but everyone’s funding it in some shape or form.

What advice would you give to a CFO who is trying to move forward with a budget for AI in their company?

CFOs have a pretty challenging task right now because they keep reading about all the possibilities, and 40% [to] 50% productivity improvements [from AI], yet when they actually start talking about, ‘OK, what are we doing and is any of that really getting realized?’ it tends to be either too small for it to make a material difference, or it tends to be too localized. At any rate, the CFOs are not seeing yet the big benefits flow through to the bottom line. I think for most CFOs, this looks like it’s an incremental cost, rather than something that is going to generate a potential save for them or create a big revenue uplift. And that’s the challenge, because CFOs have to hold the pen in terms of saying, ‘OK, let’s treat this like any new investment. Let’s create gating criteria. And let’s understand at what point the returns start coming in, or at what point can we call an experiment failed and turn it off?’ I think that’s going to be the bigger challenge of saying, ‘How do I balance this out? The company does want to experiment with a lot of new technologies, and they need to do that in order to stay competitive, but I also need to make sure that I have the ability of controlling those experiments and specially managing the return on investments.’

The good news is that CFOs have experience with having dealt with technologies of this type previously. I personally believe that AI is going to be real in terms of the impact, but we’ve seen other versions of this. We saw the metaverse, we saw before that blockchain. Investments that companies had to make, but that may not have materialized in the kind of benefits. The CFOs have seen that script play out, and they will have the ability of actually saying, ‘Look, here is my methodology for gating. There is my methodology for trying to constrict the number of experiments. And here’s how I’m going to see what becomes successful or not.’ That’s the playbook that they have to lean towards.

I think the challenge becomes: Is there a risk of spending too little? I think you do have that risk, especially in an uncertain economic environment like the one we’re still going through. I think in that environment, you are going to look at something like this, which has got a future potential but not a current potential, and say, ‘Well, that’s something that I need to be conservative on.’

FACTS + COMMENTS

Foreign investment in China has been dropping during the last 18 months, according to figures from that country’s National Bureau of Statistics.

$160 billion: The amount of foreign companies’ earnings pulled from the country in the last year and a half

$11.8 billion: Net outflow of foreign-based funds in China during the time period

5%: Decline of China’s yuan relative to the U.S. dollar so far this year, likely exacerbated by fewer foreign dollars in the country

VIDEO

We Can Fix The Funding Gap: Here’s How

QUIZ

Everything is getting more expensive nowadays, including the not-quite-traditional gifts in the holiday carol “The 12 Days of Christmas.” According to PNC’s annual analysis of market prices, which gift has seen the biggest jump in price when compared to last year?

A. 10 lords-a-leaping

B. Five golden rings

C. Two turtle doves

D. A partridge in a pear tree

See if you got the answer right here.

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