The richest man in the world is building a super-intelligent AI to understand the true nature of the universe. This is what the project means for investors.
To participate, investors should continue to buy Arista Networks
When ChatGPT launched in December 2022 its popularity shocked executives at big technology firms. The OpenAI application quickly became the fastest ever to grab one million active monthly users, smashing previous records set by Facebook, Instagram and even Tik Tok. Similarweb reported in July that chat.openai.com reached 1.8 billion monthly visits.
The infrastructure required to keep ChatGPT running smoothly is mindboggling.
The application runs in the Microsoft
MSFT (MSFT) Azure cloud. Its massive size, with 175 billion parameters, requires the scaled processing power of tens of thousands of Nvidia (NVDA) A100 GPUs. Making the chatbot responsive to user queries necessitates innovative networking solutions for servers, routers and switches. Reducing latency is going to be expensive.
Analysts at New Street Research estimated in February that the cost of delivering ChatGPT to Microsoft Bing users required an initial $4 billion infrastructure investment. That price tag will grow as the product is rolled out to more users, according to a report at CNBC.
These costs represent an important barrier to entry to competitors.
Musk knows this. He also understands that the product right will be worth billions in monthly sales.
He joined the AI arms race in April when X.ai was founded, and the company purchased thousands of Nvidia GPUs. Musk noted then that researchers were working on TruthGPT, chatbot that was unencumbered by censorship, a counter-balance to chatbots being built by OpenAI, GoogleGOOG, Meta Platforms
FB (META) and Microsoft.
During the Twitter Spaces event in July he said that X.ai researchers previously worked at OpenAI, Google Research, Microsoft Research, and DeepMind. Collectively they contributed to key AI breakthroughs such as AlphaStar, AlphaCode, Inception, Minerva, GPT-3.5 and GPT-4, Transformer-XL, Autoformalization, the Memorizing Transformer, Batch Size Scaling, and μTransfer. Musk also said that the first application under the X.ai banner is expected in only a few weeks.
Investors should focus on the companies that sell foundational equipment required to get useable products to the market. These firms are the primary beneficiaries of the AI arms race.
Arista Networks makes the ultrafast network switches that accelerate communications between racks of AI servers. These switches must to be upgraded as cloud-based applications such as ChatGPT become more popular. The key to make better user experiences in low latency.
Moving client data quickly is a big part of the origin story at Arista. The Santa Clara. Calif.-based company came to fame in September 2008 after the bankruptcy of Lehman Brothers, one of its core customers. Arista quickly deployed reduced latency systems for other finance clients, reducing milliseconds to nanoseconds. These vertical systems married hardware with a programmable software stack. Clients were able to navigate through the financial crisis.
Modern AI workloads is the next big opportunity for Arista.
According to an Arista blog post, AI networks are now operating at petabyte scale, or 1,024,000 gigabytes. These applications stretch the limits of what is currently possible with hardware alone.
There is a lot of evidence that this process is underway. Two important Arista customers, Meta Platforms (META) and Microsoft, began preparing in 2021 by retrofitting their data centers. That process is ongoing, and other deep-pocketed players will follow as they roll out chatbots and AI strategies for enterprise customers.
X.ai is now clearly in the mix as one of those players.
Meta Marshall, an analyst at Morgan StanleyMS, estimates that AI networking will be an $8 billion opportunity by 2028. She says Arista will be one of the biggest beneficiaries.
At a share price of $165.58, Arista shares trade at 24.6x forward earnings and 10.7x sales. While this may seem expensive, the compounded annual growth rate for revenues during the past five years is 21.6%. Profit margins are 31.2%. The next five years should be even better.
You can buy Arista shares into any future weakness.
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