After a period of cost cutting and layoffs — buoyed by generative AI tailwinds — software and internet companies are starting to invest for growth.
There’s “definitely a narrative shift to ‘now is the time to invest for growth in a responsible way,’” says Eric Sheridan, US internet analyst for Goldman Sachs Research, referring to the sentiment from 2,400 senior leaders across the technology, media, and telecommunication sectors who presented at Goldman Sachs’ Communacopia + Technology Conference earlier this month.
“You’re going to see this mix of growth into next year that’s married with rising margins but maybe not the outsized improvement in margins driven by efficiencies that we’ve seen over the last six to nine months,” he said on an episode of Goldman Sachs Exchanges.
New business activity in the software sector is also starting to stabilise, adds Kash Rangan, who covers the software industry for Goldman Sachs Research. If interest rates fall in 2024 — as many market participants expect — that will help lower the cost of capital, he says, and help “unfreeze the backlog of projects” put on hold.
Meanwhile, more time and cloud computing power will be needed to bring generative AI’s promised efficiencies to market, say Rangan and Sheridan. Software companies’ generative AI products will only begin to ship starting in the fourth quarter of this year and into 2024, Rangan says. And consumers have yet to change their daily patterns based on the early generative AI tools available today. “We’re still searching on the internet,” Sheridan says. “We’re still opening mobile applications. We’re still going to browsers,” he says, comparing the AI transition to the shift from desktop computing to mobile, which played out over a longer period than investors had expected.
And while tech companies’ stocks have already risen sharply, so have their earnings estimates since December 2022, Sheridan adds. In fact, multiples like price-to-earnings ratios have only risen a small amount, leaving room for some equities to climb higher.
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