The topic of AI has been prominent on Wall Street, with attention focused on its earnings as tech giants such as Nvidia (NVDA) have led stocks higher with big gains. Expectations for the AI sector remain high, but some are skeptical of its performance. A report from Guggenheim Securities detailed data from technology research firm ETR showing that IT budget growth expectations for July were roughly in line with last year.
Guggenheim Senior Research Analyst John DiFucci appears on Market Domination to discuss the current state of IT spending and its impact on the AI sector.
Commenting on AI in his report, DiFucci said, “There’s been a lot of speculation that AI is to blame for IT spending not being as robust as one would expect, but I don’t think that’s the case at all. AI spending is happening.”
DiFucci believes AI will change the world, but says, “That doesn’t mean every tech company will be able to monetize it, or be able to charge for it. Companies will use AI technology to improve their products, and we, the users, will all benefit from that. But can companies charge more than the annual increases they get for updates? Probably not for many.”
Watch the video above to hear DiFucci’s current favorite names in the software industry.
For more expert insights and the latest market trends, click here to watch this entire episode of Market Domination.
This post Nicholas Jacobino
Video Transcript
So far, 2024 has been the year of AI, and enterprise IT spending is reflecting the AI boom. Joining us now is Senior Research Analyst John DeFuch Guggenheim. John, thanks so much for having me on the show.
So, John, you talked about the new normal for software companies, John, can you expand on that?
What does that mean?
Well, Josh, I think that’s true if you look back at recent history, going back at least 20 years.
IT spending is probably twice or more than GDP growth rate, and software spending is probably greater than IT spending.
But over the past two years, software spending and IT spending has nearly matched GDP growth, but why did this happen?
People will wonder why.
Why does this happen?
Is it already, already, already over?
Will technology spending no longer be a high-growth area?
I don’t think that’s the case.
II I think what happened was that COVID-19 became widespread.
A few years ago, we pumped money into the economy.
Our government, working with other governments around the world, has spent money to enable everyone to work remotely.
Interest rates were negative.
So people had a lot of money and ended up spending it on a lot of different things.
They pulled, they pulled forward, right?
They rescinded it and put the amount they would spend in 2021 back on what they would have spent in 23 years.
So there’s a bit of a gap right now.
Just because we no longer need some of the things we already spent on doesn’t mean we won’t have high growth.
This doesn’t mean that software isn’t still a great area, but we have to rise to the challenge. We’re not done yet, and we’re not done. There was an expectation that we would see increased spending in the second half of the year.
It will be an upward trend.
A: There’s always a seasonal uptick, but it’s not the year-over-year increase that people were hoping for.
It will probably happen again next year.
Actually, that’s unclear, but that’s too far off.
It probably won’t happen in the second half.
John, what I found really interesting about your recent reporting on this is that, of course, a lot of the expectations for software spending growth are tied to AI, and people including folks at Goldman Sachs have recently questioned the AI narrative, the timing, the scale, and even the existence of any big upside that the sector is going to get.
Can you elaborate on that part of your thinking?
Well, Julie, there’s been some speculation that AI is to blame for IT spending not being as robust as people would like.
Hmm, I don’t think that’s the case at all.
Well, there’s spending on AI, and by the way, I believe AI is going to change the world.
It has already changed the world and it will continue to change the world.
That doesn’t mean all tech companies can monetize it.
That doesn’t mean you can charge a fee.
They will improve their products with AI technology and we, the users, will all benefit, but will they be able to charge more for it?
Apart from this, are there any other increases I can get at yearly renewal?
I don’t think so, and probably many people don’t think so.
In some regions, cloud vendors will support this.
Security vendors probably will, because even the bad guys have a ton of AI.
If that happens, it will likely lead to further attacks.
Well, maybe some of the data preppers and data cleansers do, but that doesn’t mean all companies will benefit from AI, and I don’t think what’s happening today is happening because people are spending money on AI.
That means they spend very little on other areas of technology.
It’s AI companies that are investing in AI, there are companies that are investing in AI, but they’re AI companies, they’re companies that want to provide AI for the enterprise consumer.
John, I’d love to hear your broader perspective.
If you’re an investor, wouldn’t you want to put capital into software, software names, as you’re listening right now?
Well, John, what do you suggest?
What is your preferred name here?
Well, Josh, I think when you think about what names are set where, the latter half is usually just names that probably have some issues with it.
This means that for most names, the numbers are already declining.
It’s a little too expensive.
The numbers are too high and will probably go down for over half of the software names.
Well, there are a few stocks you can invest in right now.
Well, a company like Octave Octaves had a breach or an incident over a year ago. It actually wasn’t a year ago, it happened in October. Now, their numbers are way down, but they’re doing really well and we think they could be one of the best software stocks for the next few years.
As for another company you could acquire, think about what I just said.
There are people now investing in AI and reaping the benefits.
Well, NVIDIA obviously does, but also cloud vendors, and the benefit that cloud vendors can provide is, when you think about it, you need a lot of data and a lot of computing power.
So, all cloud vendors will benefit.
If one of them offers performance at a lower cost, and better performance at a lower cost, they may be able to make even more money.
So yeah, it’s Oracle. Oracle, Oracle, I think that’s the best idea for us right now.
Father John, thank you so much for joining us on the show today.
Thank you very much.
Thank you, Josh.
