Investments into generative AI firms made this year by large tech companies and VCs will likely eclipse records.
The bulk of the companies on the receiving end of that capital are not yet publicly traded. But there are still implications for ETFs like the Invesco QQQ Trust (QQQ ) and the Invesco NASDAQ 100 ETF (QQQM ). Some of the major investors in generative AI startups are firms residing in those funds.
“The second quarter was propelled by X.AI Corp.‘s $6 billion funding [deal. The] third quarter was led by Sam Altman’s OpenAI securing $6.6 billion,” according to S&P Global Market Intelligence The momentum will likely continue, with Anthropic, which already raised $8.8 billion, reportedly in discussions for another fundraising round. The second and third quarters were equally [strong. They] represented the highest quarterly funding total since the first quarter of 2023, which was marked by Microsoft Corp.’s $10 billion investment in OpenAI.”
Microsoft (MSFT), long a dedicated AI investor, is the third-largest holding in QQQ and QQQM.
QQQ Holdings Driving Gen AI Funding
Through the first three quarters of 2024, roughly 80 funding rounds pertaining to generative AI occurred. Some of those included QQQ/QQQM member firms such as Meta Platforms (META) and Google parent Alphabet (GOOG).
“Building a foundation model from the ground up is capital [intensive. And] the competitive landscape is daunting, as deep-pocketed tech juggernauts such as Alphabet Inc. and Meta Platforms Inc. have access to significantly greater resources than more focused startups,” added S&P.
Making the investments by QQQ/QQQM holdings in generative AI compelling are multiple factors. First, these companies are allocating cash to generative AI startups because they see validity in the firms and the technology.
Second, some young, privately held generative AI companies have already posted greater rates of revenue growth than were seen in prior eras of disruptive technology, including cloud computing. As for areas of emphasis for generative AI investors, including QQQ/QQQM holdings, foundational modeling stands out.
“Companies competing in the foundation model arena are investing significantly to develop the next iteration of GenAI models to escape commoditization. Having the leading model will enable them to capture a substantial share of a rapidly expanding [market. The ultimate size of that] is impossible to predict. As the competition intensifies, some disheartened players will likely exit the race or consolidate,” concluded S&P.
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