This post first appeared in the Constellation Insight newsletter, which features bespoke content weekly.
Earnings season is on deck, and we are going to see a parade of technology vendors with second quarter reports. Last quarter was sluggish but better than feared since most folks were waiting for a recession. When Armageddon didn't come the stock market rejoiced. It did not hurt that generative AI euphoria drove tech stock prices too.
Now that the stock market has had a nice run it’s possible a lot of optimism is priced in. Simply put, we have a different setup for tech companies this quarter. It's unlikely that tech giants will post massive sales gains--excluding Nvidia of course--since enterprises are still wary. Yes, the cost cutting may be over, but tech buyers aren't going to be giddy right away.
To cut through all the noise, I'm looking for the following signals from earnings season.
Cloud demand. The big three cloud vendors--Microsoft, Amazon Web Services and Google Cloud--are all seeing slowing growth. In the first quarter, there was a lot of talk about cost optimization over cost cutting (funny how those two categories rhyme). Oracle saw strong cloud sales though. In addition, Constellation Research's Dion Hinchcliffe found that enterprises are looking to private cloud because it can save money.
In the second quarter, every demand signal from cloud providers will be overanalyzed by Wall Street. Meanwhile, cloud providers are buying gear to support generative AI workloads that are still largely experimental for enterprises. AI will drive cloud computing demand, but the timing is debatable.
Software price increases. Salesforce launched a series of AI services, became more efficient and raised list prices about 9% on average across clouds. Salesforce's increases are effective Aug. 1, but the CRM giant won’t be the only company raising prices. Watch software company earnings to see how much growth has been fueled by price increases.
Generative AI buzz. In the first quarter, generative AI was the hot topic. The second quarter will likely feature a lot more generative AI talk. I'll be looking at the earnings calls from enterprise buyers to see what they say about generative AI, concerns, efficiency and production implementations. The first quarter earnings transcripts turned up a decent amount of generative AI comments from multiple industries.
- JPMorgan Chase: Digital transformation, AI and data strategy sets up generative AI
- Rivian: AI, data power customer experiences
- How JetBlue is leveraging AI, LLMs to be 'most data-driven airline in the world'
- AI is everywhere including your supermarket, homebuilder and soup
- How Home Depot blends art and science of customer experience
- Goldman Sachs CIO Marco Argenti on AI, data, mental models for disruption
- Greystone CIO Niraj Patel on generative AI, creating value, managing vendors
- Accenture's Paul Daugherty: Generative AI today, but watch what's next
- Box CEO Levie on generative AI, productivity and platform neutrality
- Enterprise tech buyers wary of generative AI hype, security
- How 4 CEOs are approaching generative AI use cases in their companies
Data revenue streams. While enterprises are training large language models and looking for competitive advantage, new revenue streams are going to appear in surprising places. My hunch is that Shutterstock's move to license its IP so OpenAI can train models is just the beginning. There are multiple companies in various industries that can license data to train models. Simply put, I think we're going to see every company try to monetize its data.
IT spending. Hardware is hot given how AI is reshaping data center demand. I cannot recall talking this much about semiconductors in years. AI is going to drive a hardware upgrade cycle at some point. I'll be looking to see if hardware demand expands beyond Nvidia and semiconductors and into networking gear and servers.
