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Everyone is so excited about AI these days that whenever I have doubts, it piques my interest.
That's why Guggenheim's latest note on IT spending caught my eye. Lead analyst John DeFauci calls for a “new normal” for software companies — a reality in which enterprise budget growth isn't going to accelerate anytime soon. He based that view, in part, on data from technology researcher ETR showing that expectations for July IT budget increases are about the same as last year.
What about the boom in AI spending? What about Nvidia's parabolic sales growth as companies deploy their data center firepower to build their big language models and prepare for the AI age?
DiFucci says it hasn't made its way to software. That's partly because of cost, and partly it seems because companies haven't yet figured out what AI is useful for. (As I wrote recently, the same is true with consumers).
Corporations may eventually spend on GenAI, just not yet.
“The majority of spending on AI is being done by AI companies and public cloud companies preparing to run AI workloads for AI companies,” DiFucci wrote. “That's not to say that we won't see this change at some point, when corporations start buying Copilots and other forms of AI on a large scale, or start building their own LLMs because the cost of building and training them is so high. It is constantly decreasing, but it does not seem to be happening at the moment.
Plus, he said, it doesn't seem like companies are holding back IT spending today to spend on AI tomorrow: “Given the uncertainty about what AI spending will be worth to corporations, we Don't think future spending expectations for AI are driving what appears to be a more challenging IT spending environment today.”
The “build it and they will come” approach by companies like Microsoft, Alphabet, and Meta can pay off handsomely.
But despite some analysts' insistence that this is the year AI practically proves itself (Forbes called it “the year of AI practicality”), it's not yet clear how.
To DiFucci, that means about half of the software companies he covers may have to reset expectations for higher AI-related revenue. This includes firms such as Palo Alto Networks, Salesforce, and Workday.
At the same time, there are many corporate leaders who will tell you (a little too eagerly, perhaps) that they – and their clients – are already using AI. But as Jefferies' Brent Thill said earlier this year, it won't be until 2025 that those revenues start to materialize.
If corporate number crunchers are tightening the purse strings, AI may have to prove its worth before it starts spending.
Julie Hyman is the co-anchor. Yahoo Finance Live, weekdays 9am-11am ET. Follow him on Twitter. @julesymanAnd Read on His other stories
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