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Gemini, ChatGPT, and Beyond: Who is Winning the Chatbot Race?

The race for chatbot dominance is heating up, with Microsoft-backed OpenAI and Alphabet’s Google both making major announcements last week. Competitors such as Anthropic and Baidu are pushing forward with artificial intelligence (AI) applications as well, driven by investments and advancements in enterprise applications.

Microsoft-backed [MSFT] OpenAI has announced it’s going to train its AI on Reddit [RDDT] posts.

“Reddit has become one of the internet’s largest open archives of authentic, relevant and always up-to-date human conversations about anything and everything,” the company’s CEO, Steve Huffman, said in a press release. The content deal with OpenAI will make it easier for Reddit users to find what they are looking for, he added.

OpenAI also revealed a cheaper and faster AI model, ChatGPT-4o, last Monday, a move that will enable users to have more natural conversations with their computers and smartphones, according to OpenAI Founder Sam Altman.

The following day, Alphabet [GOOGL] launched Project Astra at the Google I/O 2024 conference. Google Deepmind Co-Founder and CEO Demis Hassabis likened Astra to “a universal agent that can be truly helpful in everyday life”.

The announcements have given both stocks a slight lift. Alphabet’s share price has increased 3.9% in the past week through 21 May, and Microsoft's share price is up 2.3%.

Not Just a Two-Horse Race

While the two leading AI developers are arguably ahead in the chatbot race, competitors are looking to gain ground. AI start-up Anthropic, in which Amazon [AMZN] has invested $4bn, announced last week that its AI assistant Claude is now available in Europe.

Under the Amazon deal, Anthropic will use Amazon Web Services (AWS) as its primary cloud provider and the company’s custom chips to build, train and deploy AI models. The partnership “unlocks exciting opportunities for customers to quickly, securely and responsibly innovate with generative AI,” Swami Sivasubramanian, Vice President of Data and AI at AWS, said in a press release.

Baidu’s [BIDU] Ernie chatbot has 200 million users as of April and, in the first quarter of the year, Chinese smartphone makers including Oppo, Xiaomi and Vivo integrated the bot into their devices, Baidu disclosed on its Q1 earnings call last week.

The Chinese search giant’s CEO, Robin Li, explained in a statement issued with the earnings that the company is working towards making its large language model (LLM) more efficient and, therefore, more affordable.

“As a new era of generative AI unfolds in China, foundation models like Ernie will serve as the underlying infrastructure, infusing various facets of people’s lives,” said Li.

Enterprise Chatbots Will be the Long-Term Winners

The chatbot market is expected to remain dynamic, with no one entity dominating the space.

“Just like smartphones aren’t a winner-takes-all space, neither will chatbots be,” Dave Mazza, CEO of Roundhill Investments, told OPTO. There will be room in the market for both premium chatbots powered by the most advanced LLMs, like OpenAI’s ChatGPT, and chatbots that are not as robust, like Google’s Gemini, which will be cheaper and more accessible, he added.

Ultimately, while the majority of chatbots launched to date were built to help people with everyday queries, the integration of LLMs into enterprise solutions will be the largest potential in the future, according to Mazza.

Baidu’s Li said on the Q1 earnings call that it is “aggressively pushing the envelope” so that business-to-consumer and business-to-business customers can “provide better user experience, to increase advertiser return on investment, [and] to enable developers to write agents and applications to let customers enjoy more effective and more efficient models”.

Enterprise spending on generative AI tools is forecast to balloon from $40bn last year to $1.3trn by 2032, according to Bloomberg Intelligence. Chatbots are likely to make up a significant chunk of this spend — more than 80% of business leaders believe the best value for their generative AI spending is chatbots for automating customer services and improving knowledge management, a Capegemini survey published in July 2023 found.

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Thematic Exposure to the Chatbot Race

Thematic ETFs can be a great way to gain exposure to the companies in the chatbot race and the broader AI theme.

The Roundhill Generative AI and Technology ETF [CHAT] has Microsoft and Alphabet as its second- and third-largest holdings, with weighting of 10.4% and 5.4%, respectively as of 20 May. Amazon and Baidu [9888:HK] are its eighth- and 10th-biggest holdings, with weighting of 3.2% and 3.1%. The fund — the first actively managed ETF focused on generative AI — is up 37.2% in the past year through 21 May and up 15.8% year-to-date.

The First Trust Nasdaq Artificial Intelligence and Robotics ETF [ROBT] also holds Alphabet, Amazon, Microsoft and Baidu. The fund is up 2.3% in the past year and down 3.4% year-to-date.

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