Source: Wall Street News

Driven by the AI boom, the tech industry is currently undergoing an unprecedented drastic reshuffle. This week's earnings reports from software and enterprise technology companies reveal the pain of this turning point — performance is generally weak, and the outlook is uncertain.

Software companies are still a long way from profiting from the AI boom

Analysts pointed out that the current AI investment frenzy has mainly spawned demand for chip manufacturing and cloud computing, and software companies are still a long way from profiting from it.

Anurag Rana, a senior analyst at Bloomberg Think Tank, said that with the exception of Microsoft, few software companies currently have a boost in revenue, and the capital is mainly going to chip giants such as Nvidia and cloud computing platforms.

Most companies don't have a dedicated AI budget, so they can only divert funds from non-AI budgets. They're still buying Nvidia chips and Dell servers, but they won't sign big software contracts. The software industry will eventually benefit from AI, but it may take years to set up, and performance improvements in the second half of this year are hopeless.

The stock price of Salesforce, which was once a star in the industry, plummeted by nearly 20% after this Thursday, the biggest one-day decline since listing in 2004. Poor performance was certainly the trigger, but the statements of company executives further highlighted the dilemma faced by software companies.

Salesforce CEO Benioff said bluntly that the “false prosperity” spawned by the past pandemic is fading away. The software and hardware that were purchased in large quantities to meet the needs of remote work are now in urgent need of integration and streamlining.

In his opinion:

Every enterprise software company has made adjustments after the pandemic, and companies that have recently published financial reports have basically repeated the same words in different ways.

In addition to Salesforce, companies such as Okta, MongoDB, and UiPath also lowered their full-year revenue forecasts in their latest financial reports. Okta pointed out that the macroeconomic environment was a drag, affecting the acquisition of new customers and the expansion of purchases from existing customers.

Meanwhile, in Veeva's earnings call, the CEO even listed GM AI as a major reason for “reassigning priorities” to customers. A similar scene has engulfed almost the entire software and enterprise technology industry.

The macro environment is sluggish, and the main capital flow of enterprises is to upgrade hardware

Another potential obstacle is the continued downturn in the macroeconomy. According to the latest PCE price index data released this week, the level of inflation was slightly higher than expected, and the Federal Reserve also kept interest rates unchanged at a 23-year high. In this environment, companies' enthusiasm for signing long-term software orders will naturally be greatly reduced.

Daniel Dines, founder of UiPath, pointed out that UiPath experienced a severe business slowdown in late March and April. Part of the reason is that the current economic situation is weak, and customer demand for annual contracts has cooled down drastically, and they are instead favoring short-term orders.

Dell's earnings report also shows that gross margin for the whole year is expected to drop 150 basis points due to the influx of more low-profit AI server orders. This also explains from the side the situation where demand for software is weak and corporate budgets are shifting more to hardware.

Overall, behind the booming development of AI, the technology industry is accelerating fragmentation and restructuring. Directly related fields such as chips and cloud computing have benefited the most, while software companies have been hit hard and have to deal with it by shrinking spending, slowing down expansion, and even layoffs.

For example, the CEO of SentinelOne said bluntly that companies' procurement habits and software evaluation standards are changing. This kinetic energy switch is a major test for the entire software industry. If you break away from the AI trend and miss an opportunity, the consequences may be that the industry is being left behind by a reshuffle.

However, some analysts believe that the current sharp correction in software stocks has provided investors with a good opportunity. Analysts Bernstein believe that leading companies with high profit certainty, such as ServiceNow, have more investment value after the valuation is repaired.

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