There's a common narrative in the investment community that says the people who really made money during the gold rush weren't the miners—but the entrepreneurs who sold the miners the picks and shovels they expected. Investors who tell this story often point to the story of California's first millionaire, Samuel Brannon, a businessman and newspaper publisher, who sold goods and supplies to gold miners in the 1840s and '50s. made the bulk of his fortune for Some will even bring up Levi Strauss, a German-born businessman who imported fine goods to San Francisco, including, of course, blue jeans. Strauss never spent a minute mining, but was certainly blessed with the profits that came with the gold rush of his era.
This 'picks and shovels' narrative undoubtedly has merit, and continues to inform investor decisions in modern, more tech-focused 'gold rushes' — but it's only part of the story. Although the first beneficiaries of the gold rush were a few lucky miners and those who sold them goods and supplies, the full impact of the period's boom was widespread, and the profits were distributed globally. . The gold rush helped finance the first transcontinental railroad, which led to a boom in “green gold” farming in California, increased industrialization, increased international trade, and transportation. and spawned communication innovations.
Here's the point: The true hallmark of a revolutionary discovery or innovation—a once-in-a-lifetime opportunity for investors and the global economy—is often its long-term network effects. The positive secondary and tertiary effects that follow after the pick and shovel seller has already made their money. This was true during the canal boom of the 18th century, and the dot-com era of the late 90s and early 2000s.
Comparing this decade's artificial intelligence boom to a gold rush, investors have been looking for evidence of these network effects for years as they try to separate hype from reality. Many respected studies and forecasts predict that AI can increase productivity, usher in an era of innovation, and even increase GDP in the long term—but so far, only a few. Companies have really benefited from the AI boom.
Tech companies like Nvidia and ASML, which sell the picks and shovels of the AI revolution, the underlying technology that allows AI to work, continue to outperform and appear on track to continue to do so. . But outside of these giants, evidence on the ground of AI's expected productivity-enhancing and economy-boosting effects has been more subtle.
However, SAP SE may be an example of the growing importance of AI. The Waldorf, Germany-based tech company, with about 108,000 employees and a market cap of $225 billion, is the world's largest provider of enterprise resource planning (ERP) software, primarily a back office for large businesses. Engine provides.
SAP's ERP software, which is increasingly moving to the cloud, helps with supply chain management, accounting, human resources, costs, and a variety of other business operations. And as Ruane Cunniff LP, an investment adviser and distributor for Sequoia Fund, a major investor in SAP, explained in his annual letter to shareholders in January, “For multinationals that are in the physical world. Whether building or moving something, SAP is just about the only game in town.
Although SAP is not an AI company, and they are not selling picks and shovels that enable AI, they are benefiting from the rise of the technology both indirectly and directly. In an interview with good fortuneSAP CFO Dominic Assam explained that the AI boom has helped drive growth at his company, and said he is dedicated to using technology to increase productivity and reduce costs internally.
When it comes to questions of hype versus reality when it comes to AI, Assam is also fast. “It's not like a fad or a hype, but it's really one of the biggest, if not the biggest, disruptions in the technology industry,” he said. good fortune
A SAP case study: the growing benefits and potential pitfalls of AI
Cementing the cloud transition
The first network advantage that can be seen at SAP that may provide evidence of the AI boom's staying power is the migration of corporations to the cloud for ERP services. Assam said AI has helped SAP move many of its ERP customers from on-premises computing to cloud-based computing, which means there is considerable demand for the company's cloud business.
“AI is really changing the last skepticism we started with travel.[premises] To Badal,” he said good fortune. “They understand that we have to go to the cloud, they know that the on-prem model doesn't work given the pace of innovation. They're going to be too slow, they're not going to be able to use the most productive systems.
The rapid pace of development in AI systems for ERP means that companies need to be able to constantly update their internal software, and this cannot be done on-site without incurring significant costs, Assam said. can In an interview with good fortune, UBS analyst Michael Brest backed the idea that AI has been a “catalyst for the modernization” of many companies' ERP software, benefiting SAP's cloud ERP business. And SAP's April 22 earnings report showed cloud revenue growth of 24% in the first quarter and current cloud backlog (CCB) growth of 27%, the fastest on record. CCB's growth figure represents cloud revenue for the coming year for which clients have already signed contracts, and is viewed by analysts as a measure of underlying demand.
New income opportunities
While SAP is not a pure AI play, like many tech companies these days it has added AI services to boost revenue and prevent customers from jumping the competition. CEO Christian Klein announced that SAP will invest $1.1 billion in its business AI unit in January as part of a business restructuring to offer more AI solutions to customers.
The company now provides a range of AI products that can help with everything from automation of tasks to sales performance, customer insights and more. According to Assam, SAP's AI offerings will also help better communication between different lines of business — accounting and human resources, for example — to eliminate errors in tasks like hiring, payroll, or employee retirement. “For example, if an employee is leaving the company, you need to make sure that all access rights to the finance system are automatically deleted, because otherwise you have a control failure and the auditors come in.” would say, 'That guy could manipulate the data,'” he said, explaining that AI will help prevent these problems. SAP even offers an “AI co-pilot” called Joule that will help organize and explain data in its various applications.
Assam argued that SAP customers – who, by reference, generate 87% of total global trade – would need a lot of data to properly train AI models, and only a few key firms It can provide But according to the CFO, SAP has the “lion's share” of its customers willing to use their data to train AI models, and that's a big part of providing them with AI services in its software. Provides opportunity, according to the CFO.
Still, SAP has yet to break out its AI revenue into its own category, and its current AI offerings may not dramatically contribute to the top line in the near term. UBS' Briest argued that the business AI unit is “a real opportunity,” but perhaps only for near-term revenue growth.
“Today, in my view, it's more about pulling along with cloud migration. And obviously, that helps customers decide to upgrade. But is it a separate revenue thing? We'll see. .I think more evidence is needed,” he said.
However, in the long term, Assam is optimistic about AI's ability to lift SAP. “We are developing them. [AI] Action as we speak. We have about 30 use cases now… 100 more will be developed for general market introduction later this year. And overtime, we're going to push it,'' he said. “So it's going to be a while until you really see it change. But when it does hit, it can be huge.
Productivity increase and margin expansion
SAP is also implementing AI internally to save costs and increase worker productivity, and these efforts were accelerated after its restructuring announcement. Assam said the ultimate goal is to use AI to help “revenue growth double cost growth” in the coming years, becoming more productive without dramatically increasing headcount. go “In some areas, we are, obviously, replacing human processing power with machine processing power, which is actually more scalable if you don't have significant inflation every year,” he said. good fortune.
Take the example of travel and expense management service SAP Concur, where SAP has implemented an AI system that responds to expense requests. “That engine is basically duplicating or replacing work that was done before. [by humans]where some people are checking travel and expense claims against the rules,” explained Assam.
Employees currently make up 69% of SAP's cost base, so reductions in related costs due to AI can be beneficial. SAP CEO Christian Klein highlighted several opportunities to use AI to save “triple-digit millions” internally in the firm's quarterly earnings call.
UBS' Briest noted that AI's ability to reduce labor costs could also be significant for the software industry as a whole. “When you look at the software industry, half the revenue goes out the door every night in salaries. That's higher as a percentage of revenue than in capitalist industries. And there's a lot more talent in roles, sales, development. , is in finance and accounting, which will change.”
For SAP, Brest argued that some of the labor cost reductions “will trickle down to the bottom line because they have a very sticky product”—that is, customers switching to a competitor because of the associated costs. Not likely.
The real impact of AI on earnings is yet to come.
SAP's recent performance and future plans provide evidence of AI's ability to increase corporate revenues, reduce costs, and increase productivity, but the true inflection point for the technology may still lie ahead. As for SAP, UBS' Briest warned that “competitors will not stand still” as AI revenues grow. “There is a wave of innovation, and startups will be attracted to your higher profits,” he said. “There will be a lot of competition over time.”
But while that may not be good news for SAP, it's “probably good for the global economy,” Brest said. After all, greater competition usually brings innovation, lower costs, and better productivity.
Also, while there is already evidence of both direct and indirect positive effects of SAP on business, even Assam stated good fortune That AI will take longer to grow earnings numbers, as many avid investors are expecting. Even when AI is generating hundreds of millions of dollars in savings or revenue growth, it will amount to only a small change in SAP's bottom line, given the company's size.
He expects that the impact of AI, like many revolutions, will not be felt as dramatically for some time — but then all at once. “Things are actually affecting something much bigger than people thought,” he said.
Assam compared the rise of AI to the dot-com bubble, where investor enthusiasm for the Internet drove some unprofitable tech stocks to insane heights before the crash, but ultimately the Internet delivered the goods. “Today, that ecosystem is worth many times more than what people thought it would be worth at the time. So I think that. [AI] will follow the same pattern,” Assam said. “That's why we at SAP are really betting big on it.”