Analyst says this company can see near-term AI returns

The tech sector is in focus as leading AI company Nvidia (NVDA) prepares to report earnings on Wednesday. With expectations around AI growing throughout the tech sector, investors are eager to see when companies will begin to see returns on their investments.

RBC Capital Markets managing director of software equity research Rishi Jaluri joins Catalysts to discuss his outlook on the tech sector and AI expectations.

Jaluria believes seeing near-term returns on AI investments will be "really tricky." However, he argues it's better for these companies to overinvest rather than underinvest, stating, "This is truly a generational technological shift," and emphasizing that investors must have patience.

Despite the general caution, Jaluria identifies only one company he believes will significantly monetize generative AI over the next twelve months: Microsoft (MSFT). He outlines three key factors necessary for Microsoft to see AI growth. First, the company needs to show investors acceleration or what AI could look like within the Azure business without capacity constraints. Second, other software companies need to develop AI modules, as Microsoft stands to benefit from this ecosystem growth. Finally, Jaluria emphasizes the importance of "actual usage and adoption of AI in Microsoft's portfolio outside of the Azure line."

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

This post was written by Angel Smith

Video Transcript

Investors, patience for A I growth seems to be wearing thin according to our next guest, while NVIDIA is expected to see massive revenue and earnings growth as companies spend big on A I. Infrastructure investors are hard pressed to find returns on these investments.

So who is best positioned in the space to help us answer that question.

We've got Rishi Juria, good friend of the show.

He is the managing director of software Equity Research at R BC Capital Markets.

That's his official title, friend of the show.

Just a side title, Rishi.

Great to see you here.

All right.

So of the companies that we've seen aggressively spending and communicating to investors that there's a bigger risk of under investing in A I who is best positioned to see the largest return on that investment in the near term.

Yeah, absolutely.

And thanks so much for having me.

Look, I'm glad you framed the question that way because near term it is gonna be really tricky.

Um I would completely agree.

It's better to overinvest and under invests in generative A I because this is truly a generational technological shift and technological unlock.

Um But I do think investors have to have patience.

And if I were to say who's really going to monetize generative A I in a big way over the next 12 months, it's a very short list in my covered universe.

It's literally Microsoft.

Uh Beyond that, I have a lot of companies that I think I, I like from an A I standpoint, I would say hubspot, I would say Mongo DB.

However, those are more 2 to 3 year stories and be on rather than something where we can see direct A I monetization in the next year.

But there will be a lot of investment required even if you're not a company like Microsoft or Amazon, that has to spend a lot of money on physical hardware.

Um It requires a lot of product development, re architecting and then the actual use of LL MS themselves is really expensive.

What is Microsoft need to do to convince Wall Street of the argument you just made Rushi because the shares were under pressure in the 48 hour period after their earnings due to questions about the ro I on their A I spend.

Yeah, I think there's really three things that they need to do.

Number one is uh they talked about still being capacity constrained when it comes to A I over the next several quarters.

And really the back half of their Fy 25 they need to show us that acceleration that what can A I growth look like in that Azure line, once they don't have capacity constraints, once they have enough data centers, once they have enough uh GP U et cetera.

Number two is I think we need to see other soccer companies develop their own A I modules.

We see hints of this right now, but a lot of the revenue that Microsoft is seeing on the A I side is by using the OPEN A I API.

And so when we see companies like hubspot or even sales force or service now on a work day developing their own generative A I systems using Open A I and we start to see usage of that that flows through to Microsoft.

And then the last is we need to see actual usage and adoption of A I in Microsoft's portfolio outside of the Azure line.

So really Office Copilot is the big one we're looking at.

It's still very early.

But I think over the next year, if we can start to see real usage and adoption of that office copilot skew, that can really help the narrative for Microsoft.