Despite the launch of groundbreaking products like Einstein GPT a year ago, Salesforce just announced first single-digit revenue growth in two decades. The trends are equally underwhelming for other industry giants like Adobe and Intuit, which rely only on software and XaaS pricing. This is all despite a bevy of new GenAI-enabled products announced many quarters ago.
The lack of concrete data on subscription revenues from the likes of ChatGPT, Microsoft Copilot, and Gemini Pro further fuels skepticism. This data void proves an absence of explosive growth; while GenAI's capabilities are undeniable, its impact on the top, let alone the bottom line, remains unclear.
Our long-standing arguments highlighting the limitations of subscription models in the new era of AI are now being validated. The instant copiability and continuous change brought about by GenAI have weakened the competitive advantages of pure software companies. Even the biggest companies are unable to sell their features as unique (think about Adobe’s product asking for a subscription amount to summarise PDF files), and they are also destabilized by the need to enhance and change incessantly.
The validation or invalidation of the second, and more positive, part of our arguments is likely the most important driver-cum-risk-parameter for stocks that are flying today despite the associated software companies’ woes. We expect AI-enabled hardware to be the only sustainable and meaningful way consumers and corporations begin paying for AI features, justifying billions of dollars invested in GenAI developments.
Is this given? Absolutely not. Early indications, including the reported troubles at high-profile newer players like Humane AI, are not heartening. Positively, the embodiment has started with Microsoft and many other OEM players announcing AI PCs and laptops. Mobile players are likely close behind, with the biggest announcements being awaited from Apple.
A delay or failure in the hardware replacement cycle could trigger a vicious downturn for today's AI-driven stock market darlings. These companies cannot indefinitely rely on investments from customers who lack revenue growth or supportive market trends. Furthermore, the scrutiny of cloud companies' revenue-generating practices, often reliant on aggressive payment practices through share subscriptions, will intensify under such a scenario.
The strength of GenAI's capabilities remains the source of optimism, fueling our belief in the impending hardware replacement cycle. However, if this shift is delayed or fails to materialize due to macroeconomic factors, it could lead to widespread investor anxiety in public markets and the private investment sphere.
None of this alters GenAI's impact on the ongoing broad innovation cycle. However, that will not matter in markets that will need validations to keep making a vast amount of investment money available at a reasonable cost of capital.
