A New AI Sheen

… on Old Tech Incumbents

As I mentioned yesterday history rhymes, especially in major Tech waves from the Internet in the nineties, to now the new and shiny ChatGPT-driven AI wave. 

Especially after the validation of the picks n’ shovels winner this time around, Nvidia, which recently kissed a trillion dollar market cap, public investors are leaning into anything with an AI sheen to their story. 

This has of course expanded to AI cloud hardware and software infrastructure companies. The latest poster boys in this move are Oracle ($ORCL) and Salesforce ($CRM), the founders of both, Larry Ellison and Marc Benioff, are old pals and older hands at making billions off new gold rushes (Cloud & SaaS recently, to AI now).

Their successes this year are a sight to behold. 

Oracle is up over 50% this year, as this CNBC piece outlines:

“Oracle shares climbed 4.8% on Wednesday to $122.24, closing at a record for a fifth straight day and the eighth time this month. The stock is up 73% over the past 12 months, outperforming all large-cap enterprise tech stocks over that stretch other than Nvidia. The shares are up over 50% in 2023, which would mark the best year for shareholders since the dot-com boom of 1999.

The company got its latest boost this week after reporting stronger-than-expected earnings and revenue, prompting nods of approval from analysts. Goldman Sachs upgraded its rating on the stock to the equivalent of hold from sell.

Within hours of the earnings report, Bloomberg declared that Ellison had reached the No. 4 spot on its ranking of billionaires, his highest spot to date. He surpassed Microsoft co-founder Bill Gates.

“The story that’s exciting investors these days? No surprise. It’s about artificial intelligence.”

It’s a well-played script:

“Now, Oracle is seeing accelerated growth thanks to the craze around generative AI, the technology that can craft images or text from a few words of human input. The company is a significant investor in Cohere, an enterprise-focused generative AI startup whose technology can power copywriting, search and summarization. 

Cohere is valued at over $2 billion and ranked No. 44 on CNBC’s 2023 Disruptor 50 List.”

Not announced yet, but Cohere will likely use Oracle Cloud services for its infrastructure. The piece continues:

“On the earnings call, Ellison told analysts that customers have “recently signed contracts to purchase more than $2 billion of capacity” on what Oracle calls its Gen 2 Cloud.”

Salesforce is enjoying similar tailwinds, as this Yahoo! Finance story highlights:

“Salesforce is wasting no time diving deeper into generative AI as it looks to keep its business ahead of rivals.

“The company introduced "AI Cloud" at the crowded event. Salesforce says its AI Cloud product will allow marketers to auto-generate personalized content for customers and developers to auto-generate code, among other use cases.”

“Wall Street is hopeful that next-generation AI will unlock new growth for Salesforce as its stock hovers around a 61% year-to-date gain, despite a sluggish economy.”

We’ve seen this movie play before in other big tech waves and cycles. Public market investors focus on places where there may be momentum in the next, new thing, often in the picks n’ shovels phase.  New public opportunities are scarce, as private  startups rush find their “product market fit.”  

With a new wave, incumbents can fast follow and add on products and services based on the new tech. In this case it’s what I call ‘AI Add-ons”. 

As opposed to the ‘AI Native’ companies like OpenAI, Anthropic, Character.ai and many other private companies. 

Most of the actual new applications and services are yet to be built and sold by companies new and old. Be they to consumer or enterprise customers. It’s all somewhere in the future. Thus the focus on what’s right in front: ‘There’s Gold in them thar Hills’. 

Remember Cisco in the Internet wave in the 1990s:

“During the Nasdaq [Internet gold rush], Cisco also had the right product at the right moment -- routers and switches needed to build out the internet [‘Internet Add-ons’]. The company provided the "picks and shovels" as web traffic boomed.

Cisco had all the Wall Street-love imaginable. The stock had raced to a heady market cap of half a trillion in 2000. Cisco was thought to be headed to a trillion-dollar market cap.”

“20+ years later Cisco hasn't surpassed its all-time high from the Internet era.”

We are in the early innings of the ‘AI Era’. And will have a lot more to say on how companies new and old can navigate through this “AI Era”.  But it’s always useful to review history when available. 

Forewarned is possibly forearmed, as they say. Especially in the Gold Rush, Picks ‘n Shovels phase. Stay tuned.

(Past and current market moves and discussions are instructive to note for historical edification. Note that this post is not investment advice in any form.)