AI revives software stocks

There’s no way to know which companies will use the technology best or how they’ll get their customers to pay.

Artificial Intelligence is finally bringing back to life moribund software companies. Wall Street has spent the year searching for the companies that will benefit most from the AI wave caused by the launch ChatGPT. Now it’s the turn of some of the companies that have been left behind after the tech boom.

The software companies are in a good position to provide the tools that companies will need to integrate generative AI into business processes and embed them into applications used by millions of people every day. It’s still not clear which companies will make the most of the technology or how to get their customers to pay.

The rise in shares of two companies, which have been struggling to grow since their recent listings on the stock exchange, highlights the hope as well as the uncertainty. Since early May, the stocks of Palantir and Palantir have nearly doubled. Each company has positioned itself as a provider of tech platforms required to use generative AI.

The revenue impact of these companies is completely opaque. Palantir CEO Alex Karp said to investors last month that “we have no pricing strategy” when it comes to generative AI. According to the theory, if new AI services live up to the promises made by the company, customers would be willing pay whatever price they chose.

Competition will be fierce. There will be plenty of competition.

It is a risk that suppliers may add AI features to their products without considering the real benefits. If every email provider provides automated text suggestions as you type a message, this feature will become commonplace and it will be hard to convince customers to pay more.

It is possible that AI could also reduce the amount of computer software purchased by customers if it increases worker productivity. GitLab is a software development and deployment tool. GitLab, like many other software companies, charges for seats, or the number people using its service. Will customers pay less for seats if AI makes developers more efficient?

Sid Sijbrandij, the chief executive of GitLab, tried to dismiss this concern in a recent interview, saying that AI would reduce the cost of software production, which would lead to more software being created. Wall Street was pleased with what they heard. GitLab shares rose by a third following the announcement of good results.

Many software companies have explored the idea of charging customers based upon consumption. The more customers use AI features, they will be charged more. This also has the benefit of directly tying revenue to the use of a service with a high computing price.

This will, in the short-term, bring about the type of uncertainty that investors hate. C3, for example, blamed the decline in revenue from existing contracts – usually an important indicator – on its switch to usage based pricing. The impact of future revenue growth is uncertain, but the decline in revenue is obvious.

Profit margins will drop in the short term, adding to the uncertainty. The majority of software companies start out cautiously by offering free AI features while they figure out which ones will be popular and how to best charge.

Shantanu Narayen, Adobe’s chief executive officer, compared the current technology platform shift to previous ones in an interview this week with Cristina Criddle of The Financial Times. He predicted that the venture capital-backed AI firms that have sprouted and lack a clear business model would eventually be wiped out. Prior platform shifts brought about protracted uncertainty, but the winners eventually emerged.

Investors have already bet that Adobe, an established cloud software company, will be in the best position to ride this AI wave. Adobe’s shares are up 30 percent this year. Shares of ServiceNow, a cloud software firm that has spoken of adding AI into many of its products, are up about 40% this year. These companies must still prove that they add real value and are not simply resellers of generative AI developed by OpenAI.

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