AI: Starting to have an impact?

There are only two ways to react to exponential change: too early or too late. AI is the fastest growing workload on the planet – it is not too early.

In the last 9 months, all large enterprises have developed an LLM game plan of some sort. However, the investment community seems to have a less well formed opinion.

· Our conviction in AI as a long term theme further increased after Q3 reports. We believe software, particularly enterprise B2B software companies are the AI theme’s answer.

· Our job is to convince you to spend more time understanding the extent of the change taking place, and to think about putting more money behind the theme.

Our key question is still the same: Which companies have the best chance of giving us the most earnings upside in 2024, 2025 or creating unassailable moats that the market does not yet recognise?

LLM will follow the hype cycle that all new inventions follow, it is necessary to have an opinion. MSFT might be the only answer you arrive at, but we would argue the investment universe is much more complex, with many more options.

Conclusions:

We believe, software companies will see acceleration in growth in 2024 and 2025 that it is not in consensus estimates at the moment.

We expect market to broaden its focus beyond the magnificent seven due to AI adoption acceleration as well a potential cyclical recovery in tech spending.

Platform companies such as CRM, NOW, HUBS, CRWD, ADBE would be our choice and depending upon your appetite for risk, companies such as MDB, ESTC, PATH, WIX.

We have not written on the Magnificent 7 – yes they clearly benefit, yes they are very dominant and the mountain of money that will flow towards NVDA, Azure etc will be hard to compete with, however what are we really going to add to your understanding on MSFT, AWS or the impact on GOOG/META’s Advertising business?

Valuation: We have ignored valuation and avoided upside quantification because margin of error on these predictions will be very large. As our research in ADBE showed, additional revenue could be anywhere between $1-10bn, depending on the adoption curve and pricing estimates.

In our discussion in this note we focus on companies that benefit the most from early adoption of AI, leading to upgrades in 2024 and 2025 revenues.

Link to PDF of work