In today’s Finshots, we talk about AI washing and why companies are doing it.

The Story

Hindenburg Research published a scathing new report about accounting manipulation at a company. Yup, we’re talking about the same Hindenburg that clashed with Adani.

Its latest target?

An American multinational company called Equinix that claims to be a global leader in the data centre market. This means that it has a significant market share in the business of leasing out space to its clients so that they can house servers or network hardware.

And in the past year, its valuation has seen a 30% increase to $80 billion.

But guess why investors are hyped up?

Well, it’s because Equinix has been telling people, “Hey, AI and machine learning will require more power at data centres. And we’re going to sell them the power for their needs. So our revenues are definitely going up.”

And Hindenburg isn’t quite buying that AI hype. The research firm believes that Equinix does not have enough power capacity to power any of this AI demand. So Hindenburg thinks Equinix is simply trying to ride the AI bandwagon by making false claims.

That folks, could be a classic example of AI washing!

It’s a new con in town where companies create false hype about their AI capabilities to attract investors and drive their valuations higher.

And the phenomenon is picking up pace globally. A couple of weeks ago, the US Securities and Exchange Commission (SEC) slapped a $400,000 penalty on two investment advisory companies Delphia (USA) Inc. and Global Predictions Inc. for AI washing.

While Delphia claimed to use AI to predict which companies and trends were about to make it big so that it could invest in them before everyone else, Global Predictions boasted of being the first AI-regulated financial advisor.

But here’s what the SEC Chair Gary Gensler said when the SEC uncovered the truth

We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,

We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.

So why are companies AI washing and how did it even come to this, you ask?

Well, if you remember, 2023 was the year of AI hype. And chipmaker Nvidia was a big winner in the AI gold rush. That year its stock price soared 239% because everyone wanted Nvidia’s powerful graphics processing units (GPUs) to run advanced AI models.

Besides, the ChatGPT-driven generative AI buzz that kicked off in 2022 pushed investors to pump in $29 billion into nearly 700 generative AI deals. That’s a massive 260% increase in value from the previous year! And everyone wants to get on the AI bandwagon. Big Tech and VCs (venture capitalists) don’t want to miss out on the returns from what AI can do in the future.

And that means companies will be tempted to talk up their AI capabilities to drive up their revenues and attract funding from investors too.

In a way, it’s quite reminiscent of instances in the past.

For instance, the most recent one being the metaverse mania. Everyone predicted it would be the future of the internet. Facebook even renamed the parent entity to Meta in October 2021 to signal its ambitions. And by March 2022, the word was mentioned 552 times by 170 companies. It was double the mentions of the previous year and you can bet that many of them may not have harboured serious metaverse ambitions. They might have just wanted to show that they were getting with the times too.

Then you had the dot com craze of the late 1990s where companies randomly added “.com” to their name to attract investors.

Yup, finance professors from Purdue University published a study of 95 companies that added “.com”, “.net” or “Internet” to their names during the dot com craze. And interestingly, they found that on average, the stock prices of such companies increased 74% five days after their name change announcement, as compared to five days before.

And even after the dot com bubble burst, researchers found that the gains that these companies had made with the name change remained. It was permanent! And the researchers called this phenomenon ‘striking’.

If you rewind even further to the 1920s, you’ll find something similar. Airplanes were the shiny new thing back then. And investors got quite manic about it. They all wanted a piece of a company called Seaboard Airlines. Only later did they realise that the company was in the railroad business.

So yeah, AI washing could be history repeating itself. And investors better be careful or they’ll get their fingers burnt in the rush to catch the AI bus.

Until then…

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