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Chatbot upgrades help Microsoft and Alphabet shares to rally

OpenAI, backed by Microsoft, unveiled an upgraded version of its chatbot technology last week, which seems to be smarter, more creative and less prone to making up facts. Google has also piqued interest with its healthcare chatbot.

– The latest chatbot models from Microsoft-backed OpenAI and Google demonstrate specialised knowledge.

– GPT-4 will help Microsoft to consolidate its position at the front of the AI arms race.

– Roundhill has filed for the Generative AI & Technology ETF, which would trade under the ticker CHAT.

The chatbot race buoyed share prices last week: Microsoft [MSFT]-backed OpenAI launched the latest iteration of its chatbot, GPT-4, while Alphabet’s [GOOGL] Google unveiled an update to its healthcare large language model (LLM), Med-PaLM.

GPT-4 “exhibits human-level performance on various professional and academic benchmarks,” according to OpenAI. The upgraded LLM passed a simulated bar exam that would place it in the top 10% of scorers.

At the Check Up, its annual healthcare technology event, Google said the next version of Med-PaLM has “consistently performed at an ‘expert’ doctor level” when it comes to answering medical exam questions. Med-PaLM scored 85% on a recent test, an 18% improvement on the previous model.

The chatbot frenzy helped both stocks to rally last week, while the broader market was in turmoil following the Silicon Valley Bank collapse. The Microsoft share price jumped 12.4% last week and is up 16.8% year-to-date, while Alphabet’s gained 12.1% last week and is up 15.2% year-to-date.

Chinese competitors bid to rival Chat-GPT

Chinese companies are also rushing to jump on the chatbot bandwagon. Internet giant Tencent [0700.HK] has put together a team to develop its rival to ChatGPT, and NetEase [9999.HK] has indicated it will integrate AI chatbot dialogue into future mobile game releases.

Search engine Baidu’s [BIDU] offering, Ernie Bot, disappointed investors with its demo, sparking an initial sell-off of its shares when the US market opened last Thursday.

However, shares rebounded the following day, after the company announced that within two hours of the public demonstration 30,000 businesses had signed up to trial its chatbot service.

Domestic rivals

In terms of domestic competition, Amazon [AMZN] has announced it’s developing a ChatGPT rival with AI start-up Hugging Face. It remains to be seen whether the tech giant can make a dent in the dominance of Microsoft or Alphabet.

Frank Downing, director of research at Ark Invest covering next-generation internet, wrote in February that Amazon Web Services (AWS) has been talking up integrating AI into services, yet the company warned on its most recent earnings call that it expects optimisation efforts will be a headwind for AWS growth over the next two quarters or more.

“Could ecommerce be less well-positioned to capitalise on generative AI technology, even with services like Alexa? We do not believe so,” wrote Downing.

Microsoft is in pole position

Interest in AI and chatbots continues to grow. According to research by WisdomTree’s global head of research Christopher Gannatti, 431 company earnings reports and events in February mentioned ‘ChatGPT’ or ‘generative AI’, up from 53 three months earlier and 48 three months before that.

There are likely to be many more entrants in the chatbot race as companies look to invest in cutting-edge tools to gain a competitive advantage. Some will inevitably fail in their endeavours, however.

As for which company might come out on top, Wedbush analyst Dan Ives doesn’t see there being an outright winner. He does believe that GPT-4 will help Microsoft to consolidate its position in the AI arms race, versus Google and other tech peers.

AI Bing will be a near-term tailwind, but the long-term opportunity is integrating ChatGPT into cloud and enterprise applications, tweeted Ives. Monetisation from the chatbot could add $20 per share to Microsoft’s value, he added. Wedbush raised its price target in February from $280 to $290, implying an upside of 3.8% from the most recent closing price of $279.43.

ETFs in focus: Roundhill Generative AI & Technology ETF

Inspired by the chatbot trend, Roundhill is set to launch the Generative AI & Technology ETF [CHAT], previously the Conversational AI, AI and Innovation ETF, according to a filing with the Securities and Exchange Commission.

Until the ETF launches, investors can get exposure to the theme through the WisdomTree Artificial Intelligence ETF [WTAI.L]. Chipmaker Nvidia [NVDA] makes up the second-largest holding at 3.12% of assets under management as of 17 March. Semiconductors are the processing power behind the AI megatrend, and the rise of chatbots will thus drive demand for advanced processors.

The fund is up 19% year-to-date, though down 2.8% in the past month. 

The Qraft AI ETF [QRFT] uses AI to actively manage its portfolio. As of 17 March, Microsoft has the biggest weighting of 3.61%, while Alphabet is the sixth-biggest holding with a weighting of 1.60%.

The fund is up 2.5% year-to-date, though down 2.5% over the past month.

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