AI boom fading? Why IT spending data may not be add up

The buzz around AI has been palpable on Wall Street with much focus on its performance as tech giants like Nvidia (NVDA) led a rally with massive gains. Although much excitement for the sector still exists, there are are some who are skeptical of its performance. A note from Guggenheim securities detailed data that showed data from tech researcher ETR that shows July IT budget growth expectations are about the same as last year’s.

Guggenheim senior research analyst John DiFucci joins Market Domination to discuss his note on the state of IT spending and how it affects the AI sector.

DiFucci comments on his report, speaking over the narrative of AI: "There's been some conjecture out there that AI is the reason why IT spending isn't as robust as people would hope it would be, I don't think that's the case at all. There is spending on AI."

DiFucci says that though he believes AI will change the world, "that doesn't mean that all tech companies are going to be able to monetize that. It doesn't mean they're going to be able to charge for it. They're going to improve their products with AI technologies and we're going to benefit. We are, all of us, the users, but are they going to be able to charge more for it beyond the uplift they get every year on renewal? I know a lot of them probably won't."

Watch the video above to hear which names in the software space DiFucci likes right now.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video Transcript

So far 2024 has been the year of A I but is corporate it spending reflecting that A I boom joining us now is John Def Fucci Guggenheim, senior research analyst, John is good to have you on the show.

So you talk about John um what you see is a new normal for software companies walk us through that John.

What, what do you mean by that?

Yeah, Josh, I think if we look back to in recent history anyway, even go back 20 years.

It spending has been maybe two times or better than that of GDP growth and software spending is probably better than it spending.

But over the last two years, we've seen software spending or it spending be about what GDP growth has been and why has that happened?

People wonder why is that?

Why is that happening?

Is it, is it, is it over?

Is, is tech spending just gonna, is that not gonna be a high growth area anymore?

I don't think that's the case.

II I think what happened is we had COVID, right?

A couple of years ago, we poured money into the economy.

Our governments did our government other governments in the world we spent on it to get everybody to be able to work remotely.

Interest rates were negative.

So people had a lot of money and they ended up spending on a lot of things.

They pulled, they pulled it forward, right.

They pulled it, pulled it back to what to spend it back in 2021 on things that they would have spent 23 years later.

So now we have this little bit of a gap.

We don't need some of the things we already spent on doesn't mean um it is not gonna be high, high growth.

It doesn't mean software is not still a great area to be in, but we have to work through this and we're not done yet and it doesn't, there was this hope we're gonna get this uptick in spending in the second half.

We'll get an uptick.

A we always get a seasonal uptick, but it's not gonna be the kind of year over year uptick that people had hoped for.

Maybe it happens next year.

Actually, it's unclear, but that's too far out.

It's probably not going to happen in the second half.

Well, and John, what was so fascinating to me about your recent report on all of this is that of course, a lot of the expectations for that boost in software spending has been tied to A I and you're among the voices that recently including the folks over Goldman Sachs has been sort of questioning the A I narrative, both the timing, the magnitude, even maybe the existence of the huge lift that this sector is gonna get.

Can you walk us through that part of your thinking?

Yeah, there's been Julie, there's been some conjecture out there that A I is the reason why it spending isn't as robust as people would hope it would be.

Um I don't think that's the case at all.

Uh There is spending on A I and by the way, I believe A I is gonna change the world.

It's already changing the world and it will change the world.

That doesn't mean that all tech companies are gonna be able to monetize that.

It doesn't mean they're gonna be able to charge for it.

They're gonna improve their, their, their products with A I technologies and we're gonna benefit, we are all of us the users but are they gonna be able to charge more for it?

Beyond the, this the uplift they get every year on renewal?

I don't, a lot of them probably won't.

Some areas will cloud vendors will.

Security vendors probably will because even even the bad guys will have a lot of A I.

So they'll be, there probably will be more attacks.

Um Maybe some of the data um preparers, data cleansers will, but that doesn't mean that every company is gonna benefit from A I and I don't think that what's happening out there today is because people are spending on A I.

So they're not spending on other areas of tech for the most part that's not happening.

The people spending on A I are A I companies, some companies are spending on A I but they're A I companies and they're companies that want, want to provide A I for, for uh corporate consumers.

So John, I'm curious to know just giving your kind of broad views there.

If you're an investor, you're listening right now, you wanna, you wanna commit capital to the software, the software names?

Uh John, what would you suggest?

What are, what are some names you prefer here?

Yeah, Josh, I think, I just, I think if you think about where um what na what names are set up, well, for the second half, they are usually some names that, that probably had some problems.

So the numbers have come down already for the most part names.

They're, they're a little too high.

Numbers are too high and they're probably gonna come down for more than half of software names.

Um Some names you can invest in now.

Uh a company like Octave Octaves had a breach or an incident, they call it um a little more than a year ago or actually it's not a year ago, it was back in October and now they, their numbers have come down quite a bit, but they're doing really well and we think it could be one of the best software stocks over the next few years.

Another company you can buy, think of what I just said.

There are there is spending on A I who's benefiting from that today.

Well, NVIDIA obviously is, but the cloud vendors are and well, what cloud vendor may have an advantage in that if they can provide, you think about it, you need a lot of data and you need a lot of compute.

So all the cloud vendors are gonna benefit.

What if one of them provided performance at a lower cost, better performance at a lower cost, they might benefit even more.

Well, that's oracle, I think oracles, oracles, our best idea right now.

God John, thank you so much for joining the show today.

I really appreciate it.

Thanks Josh.