Why tech's AI spending boom may not be what you think: Analyst

US equities (^GSPC, ^DJI, ^IXIC) have begun to rebound after a sharp sell-off in previous trading days, closing the market ahead on Tuesday. Many questions remain as to how investors should play this bounce back but one of them is should investors continue to buy tech after coming down from previous highs?

KeyBanc Capital Markets equity research analyst Jackson Ader joins Asking For A Trend to give insight into the tech sector, how its performing, and what investors need to know.

In terms of a chief concern this earnings season for tech, capex spending, Ader relates back to Microsoft (MSFT) and its recent earnings: "What Microsoft said was, 'hey, we're actually a little bit more flexible than maybe you realize. Only half of our capex really goes into those fixed long term, 15, 20-year assets. And the other half is kits, GPUs.' Maybe they're going to be GPUs, maybe they're going to be CPUs, maybe they're going to be in-house chips. But the focus on flexibility in artificial intelligence, I think is going to be a really good one, and key for the industry. And that goes all the way down to software and all the way down to large language models. "

For more expert insight and the latest market action, click here to watch this full episode of Asking for a Trend

This post was written by Nicholas Jacobino

Video Transcript

The markets rebounded in a big way.

Tuesday with the NASDAQ leading the surge closing up just over 1% after a three day tech led sell off.

Joining us now is Jackson Ader, Key Bank capital markets, equity research analyst, Jackson, uh, maybe start big picture.

You know, we're making our way through this earnings season.

I'm curious, Jackson, you know, you read the reports, you listen to conference calls, what have just been some of your, your big takeaways based on, on your coverage universe?

Yeah.

Thanks for having me, Josh.

Um I'd say the first big takeaway is that, you know, the second half of the year and early in this second quarter, earnings season results have been ok. We picked up some negativity or maybe some skepticism um, on A I in our, in our first half survey, our key bank cio first half survey.

And for the most part results have been better in the second quarter than they were in the first quarter, which is, um, I guess I'll say better than feared.

What did you make Jackson?

And you kinda leading me around.

I wanted to go.

It was just such an one trend in this earnings season I thought was just so interesting.

I wanna get your take on it was and it certainly impacted some of the names, you know, and cover, um, this sort of skepticism that crept in for some investors when they started, they started looking at these companies and thinking, ok, I see this spending on a I spend spend, spend, but increasingly some questions, where's the usage?

Where's the monetization?

Where's the return?

Uh What did you make of, of those questions, Jackson, you know what I think one thing that I really liked to hear was uh Satya at Microsoft talked about flexibility in the Capex model.

So we are hearing a lot of questions about, are we over building, are we getting stuck maybe spending too much in Capex on data centers and GP US?

And if it doesn't show up in A I applications, what's gonna happen to these gigantic build outs?

And so what Microsoft said was, hey, you were actually a little bit more flexible than maybe you realize only half of our cap X really goes into those fixed long term 1520 year assets and the other half is kits, right GP US?

Maybe they're gonna be GP US, maybe they're gonna be CP US, maybe they're gonna be in house chips.

Um But the focus on flexibility in artificial intelligence, I think is gonna be a really good one and key for the industry and that goes all the way down to software and all the way down to large language models.

If you think about smaller language models or even industry or company specific language models, they can be more flexible, they can be more cost efficient.

And I'm, I'm joining you.

So we're, we're at the key bank capital markets, uh technology leadership form.

It's our 25th, my first but 25th and we heard a bunch about small language models, flexibility trying to get time to value to prove the applications are actually worth investing in.

So that maybe then we have um the trickle up into the Capex being worth it.

And I wanna end here, Jackson just sticking with Microsoft because they listen, they reported obviously some investors were disappointed with that print.

Um you're a bull though, Jackson, you're overweight.

How come what are the catalysts ahead uh that keep you bullish on Microsoft?

So I'm bullish on Microsoft because they continue to be um a a clear, I think winner in two ways to make money in artificial intelligence as your A I continues to be strong, a strong grower.

And you know, even if the early returns or, or the early feedback on some of the Microsoft copilot testing and pilots out there from end customers have been I would say lackluster, but this is the place over over all of the other applications.

You know, we touch Microsoft and the office platform more than anything else.

When we are knowledge workers at work and I think this is going to be, you know, the, the the tip of the spear in terms of applications that end up turning into revenue.

I think it's gonna take a little bit longer than maybe we had hoped when we started the year.

Um But 2025 could absolutely be that year where we start to see Microsoft's office 365 commercial business re accelerate in the second half, Jackson.

Great to have you on the show today.

Thank you so much.

Appreciate it.

Thanks Josh.