Artificial intelligence may be the “magic panacea” for most fields, but telecommunications may be an exception. Raymond James Communications Analyst Frank Luthan will appear on his Yahoo Finance Live to dive deeper into his AI deployment in the data center and the slow change and technology adoption of telecoms.
video transcript
Brad Smith: Also, folks, we are talking about AI, which is the new buzzword with soaring demand and the industry grappling with the changing technology landscape. But our next guest said that while AI may offer a magic panacea, it won’t necessarily be the hockey stick of change for a particular sector: telecoms. Joined by Raymond James Telecom Analyst Frank Louthan. Frank, I’m glad you’re here this morning. Now, from your point of view, what is the magic elixir here?
Frank Luthan: Well, we look at this from a team perspective. We dug deep into AI. And from my side as I continue to cover telecom providers and data service providers, this is definitely a plus for them and a tailwind. But it’s just to sustain growth, not necessarily the hockey stick change we’ve seen in other more directly related sectors, such as chips.
However, the demand from AI for data centers, fiber providers, network providers and wireless carriers is sure to increase and will continue to grow in the coming years. It’s a lot quieter than people thought in the early days and how it’s impacting each sector.
– Frank, I don’t know if you’ve had a chance to hear caster Sheena Smith talk about Morgan Stanley’s price target on Microsoft and where Microsoft might land in the AI space. Who do you think is the leader in the telecommunications industry and who has the greatest chance to capitalize on this massive focus on AI, especially generative AI?
Frank Luthan: Absolutely. Therefore, the data centers we are targeting, Equinix and Digital Realty Trust, are the data centers most directly impacted in the near term. Where companies like Microsoft and cloud providers deploy their AI engines, where they deploy different things for AI instances, and where they deploy them for training modules, and so on. And that’s where you’ll see it.
We are already starting to see some data centers hitting their limits in terms of pricing and such, as some AI deployments are paying very high fees to access their data. And what’s really important is that when you look at AI, it’s generally run by GPUs, not CPUs. And the GPU consumes more power. If you look at the data center industry, they sell power, not space.
So it’s a very good driver for demand, such as having a demand driver that consumes more energy. Equinix and Digital Realty are therefore the two companies most directly impacted by this sector, followed by telecom networks.
Brad Smith: Since Equinix is mentioned, I’ll go into more detail on some of the names specifically included within. But Akamai, even within that scope, there are a few others we’re looking at here.
Frank Luthan: Absolutely. Akamai is another service that content delivery networks can benefit from. The thing to remember is that for every application you need to get data, like someone walking in and out of your data center, going in and out of your AI engine, and so on. . So you need a distribution network for them. But Akamai and others are also developing software security platforms, which will be just as important. Moving all that data and putting it into different AI platforms increases the number of attacks on software security.
We need to strengthen the security of the data we collect. Additionally, data must be collected and deployed on a broader basis. It could be argued that AI needs to be used further down the edge of the network to better filter the types of information sent back. So you don’t have to send everything back. Expensive.
Therefore, content delivery networks may also benefit. And, of course, those that provide fiber and so on. And eventually something will show up on the wireless side. Americans value entertainment and convenience above all else.
And if you want a commercial AI device to succeed at some point, it will need to run on a mobile phone. So at some point the traffic there will also increase. But all of this will take more time, so I think the more direct beneficiaries, at least in the short term, will be the data centers, and maybe he’s the CDN.
– So, I want to extend this to what you mention in your note soon. You said the AI debate should be about degree, not direction. And of course we know that spending and investments are being made. But is it big enough to turn this into a question, wide enough to offset all kinds of incoming headwinds?
Frank Luthan: I definitely think so. Again, it’s just slow. All of this will change over time. Regarding telecommunications, I would say that the rate of change, even if it speeds up, is very slow. I’ve covered this industry for many years, and copper phone lines still exist. That is why industry transformation takes a long time.
But when you look at this data migration, and technology migration like we saw with cloud computing a few years ago, it’s a positive thing. Over time, older technologies tend to be replaced and older technologies continue to be maintained. Growth is progressing. That is why we are confident in our future growth rate. Because this is coming on the flip side and will continue to drive revenue and replace roles or the technology will die.
Brad Smith: Frank, I’d rather ask about the SIC Les Paul you got in the background, but I’d like to at least include it in the conversation here for the day. What timeline should investors keep in mind when talking about this kind of transformation, and how might AI impact the telecom sector?
Frank Luthan: Well, if you look over the next two to three years, you’ll see that it’s more pervasive. For example, the data centers I referenced, Equinix and DR, both say AI is part of the conversation. But that’s still just a small part of the reservation, not really offered here in any meaningful way.
And the same goes for telecom providers and so on. When we talk to them, they’ve all had conversations with customers. that is what they are aware of. They’re trying to put it in place when it’s in demand. However, in relative terms, the amount of computing platforms in deployments and network traffic is still very small.
So, fast forward three years and you’ll see that it’s even more prevalent, but it’s definitely generating a lot of buzz. Again, looking at what will continue to grow over the next 12 months as other technologies begin to decline, I would say that AI is coming to fill the demand void.
– This was certainly the case in the previous fiscal year. Let’s see if that’s the buzzword of the moment. Frank Luthan, Raymond James Communications Analyst. Thank you very much for joining us this morning.
