Artificial intelligence has finally given life to a dying software stock. Throughout the year, Wall Street has been searching for the biggest beneficiaries of the AI wave caused by ChatGPT’s launch. Now it was the turn of a group of companies that had been in the doldrums after the pandemic tech boom.
Software companies are well positioned both to provide the tools needed to embed generative AI into business processes and to embed AI into the applications millions of employees use every day. is needed. But it’s still not entirely clear which technology will find the best use for this technology, or how to get customers to pay for it.
The surge in share prices for two companies that have struggled to grow consistently since their recent stock market listings highlights both hope and uncertainty. Shares of Palantir and C3.ai have nearly doubled since early May as both tout themselves as suppliers of the technology platforms needed to harness generative AI.
But these companies will be competing with giants such as Google and Microsoft, and the impact on revenue is entirely uncertain. Palantir CEO Alex Karp told investors last month: Generative AI “has no pricing strategy.” Theory: If a new AI service is as good as the company claims, customers will be willing to pay for it somehow.
There will be a lot of competition. The plug-and-play nature of generative AI (anyone can consume large language models created by companies like OpenAI) has made this technology readily available to all software companies.
There is a clear risk that suppliers will race to add AI ancillaries to existing products without giving much thought to what real benefits the technology will bring. And if every email his provider offered automatic text suggestions when composing a message, the feature would quickly become banal, making it difficult to convince customers to pay.
There is also the added risk that if AI actually makes employees more productive, customers may buy less software. This is a problem faced by companies such as his GitLab, which are used to create and deploy software. Like many software companies, GitLab charges based on the number of seats, or people, using its services. If AI makes developers more productive, will customers need less AI and pay for fewer seats?
GitLab CEO Sid Sijbrandij tried to dispel that concern this week, arguing that more software will be created if AI reduces the cost of producing software. Wall Street liked the content. GitLab’s share price rose by a third after GitLab announced strong earnings and outlined plans to build generative AI into every aspect of its service.
Due to the threat of user-based pricing and the potential difficulty in persuading customers to pay a premium, many software companies are exploring the idea of charging based on consumption. The more your customers use the new AI capabilities, the more features will become available. to pay. This also has the benefit of tying revenue directly to the use of services with high computing costs.
In the short term, however, it introduces the kind of uncertainty that investors usually dislike. C3, for example, alleges that it’s switching to pay-as-you-go pricing is responsible for the low residual revenue from existing contracts, which is usually a key metric. The decline is clear, but the impact of future earnings growth is unclear.
Further uncertainty will reduce profit margins in the short term. Most software companies are starting cautiously, offering new AI capabilities for free while considering which features will prevail and how best to charge for them.
In an interview with the FT’s Christina Criddle this week, Adobe head Shantanu Narayan compared this to previous tech platform changes. He predicted that many venture capital-backed AI companies without clear business models would eventually be wiped out. But previous platform migrations have been accompanied by long periods of uncertainty before a winner emerges.
Investors already expect incumbents such as Adobe to see their stocks rise 30% this year, putting them well-positioned to ride the AI wave. Similarly, the stock of ServiceNow, another long-established cloud software company that has been talking about adding AI to many of its services, has surged about 40% this year. But companies like this need to show that they are creating real value, and not just as resellers of generative AI developed by companies like OpenAI.
richard.waters@ft.com
