Investments in AI have sent tech stocks skyrocketing in 2023. Rishi Jaluria, Software Equity Analyst at RBC Capital Markets, will appear on Yahoo Finance Live to discuss the best ways to invest in AI and the impact of emerging technology trends on the market.
video transcript
Sheena Smith: have understood. Well, so far this year’s business buzzword is AI. And Salesforce CEO Marc Benioff thinks the excitement is justified, telling our own Brian Sotzi why he thinks it’s a game changer.
Marc Benioff: We have seen many exciting technology waves in our industry: cloud, social, mobile. But this wave of AI will be the biggest that anyone has ever seen. I think the success of OpenAI proves that this will be one of the fastest growing movements not only in the consumer market, but also in the enterprise market.
Sheena Smith: One of the fastest movements. Let’s talk about how fast and how excited you should be. Rishi Jarria, a software equity analyst at RBC Capital Markets. Rishi, nice to see you again.
So, obviously I heard Benioff get very excited about this. You’ve been covering the tech industry for some time. How important is AI and the future potential of this technology?
Rishi Jalur: Yes, nice to meet you. And thank you so much for having me. It’s always great to be here. See, I think there’s just too much hype here, even though people worry about it. Based on everything we see there, the conversations we have, I can assure you that this technology is real and will change society. the way everything happens. Over the course of my lifetime, he actually had four major technological revolutions that changed everything.
The first was the Internet in the 90’s. Think about what it did to society. The second is the cloud, thinking about Salesforce or AWS. The third is mobile, iPhone and Android. And the fourth is actually generative AI. And one of the things that makes generative AI so important is not just how powerful it is, but how easy it is to use through applications like ChatGPT.
That is exactly what democratized AI. I think this shows not only how powerful it is, but how flexible it is and how widely it can be deployed among all knowledge workers. And I truly believe this will be a very transformative technology. I think investors should choose their spots carefully and not get caught up in the undue hype.
Diane Hall: Speaking of picking and choosing your own spot, Rishi. So who would you classify as the market leader? Of course, there is Microsoft, and the other big player we’re talking about, Salesforce. Who do you see as the market leaders in this area, especially when it comes to generative AI?
Rishi Jalur: yes. Again, Microsoft is clearly that company, but I think there are whole software companies out there that could benefit from generative AI in the short and long term. And I think it’s very important that they are long-term beneficiaries. It’s not just benefits for a year or two before benefits taper off. So from that vantage point, think beyond Microsoft and Salesforce and companies like HubSpot that are completely rebuilding around their chat-first feature, Chat Spot.
Consider a vertical software company like Vivo in the pharmaceutical industry. The company has a significant edge in data and can help clients verticalize his LLM. I think of MongoDB in the next generation database space. This accelerates many migrations from legacy systems such as Oracle. Now consider companies like his NICE in the contact center space. Contact centers are one area that I believe will be greatly disrupted by generative AI. As a leader in software that provides solutions for call centers, I think this is going to be a really big deal.
Sheena Smith: Rishi, when it comes to all the hype around AI, Bank of America released a survey of fund managers today that puts people at great risk because of the fear of missing out when it comes to AI. He says he feels exposed. Do you think he would give a red flag or two that an investor should keep in mind when picking some of the winners you just talked about?
Rishi Jalur: yes. I think there are some really good ones. First, consider the fact that this company really does what it is AI, or is it just lip service by calling its solution Generative AI? And I’ll use an analogy to the early days of the cloud. There were several companies that said they were doing the cloud, but were really just hosting the same software solutions in the cloud. Meanwhile, companies like MongoDB have truly been redesigned for the cloud. .
So my first question is, are you really doing AI? The next thing I want to ask is, is there a path to monetization in the end? And if there really isn’t a path to monetization, I think it’s going to be a bit of a struggle. I think general AI benefits everyone.
Every company will have a generative AI strategy. I’m at a fintech conference here in New York and every company I talk to says they need to understand generative AI. But I think the open-ended question mark is can it be monetized or is it a bet?
And I think for companies where it’s going to be table stakes, they’re actually not too far off and can get a hefty margin. I think companies like Microsoft, HubSpot, MongoDB that can directly or indirectly monetize it will benefit. So I think there are two big things. Is this technology real and is there a way to monetize it?
Diane Hall: And Rishi, I have something to ask you. So legislators are now clearly focused on AI, especially generative AI. they have their first conversation. Some lawmakers are discussing it today. They approach it from his two different ways.
First, how will America continue to maintain its leadership in this area? But there will also be debates about the regulatory environment. Who’s going to lose out when regulation tightens around generative AI?
Rishi Jalur: yes. Look, I think companies that believe in their own advantage in generative AI have real customer data, personal consumer data, not business data, as a way to train their LLMs. I believe these are the most effective. hurt. I think the more enterprise-focused players will be more insulated from regulation, where the data they have is more general insight into industries and processes and workflows.
So when a company says, “We have big data advantages,” I’m kind of cautious. I think the question is who owns the data, who has the rights to it, and what the law says. Since Microsoft is an enterprise software company, I don’t think there is such a risk. And much of the insight they provide isn’t specific to enterprise data, it’s about the history of how people have interacted with software rather than specific data about users or consumers.
Sheena Smith: Rishi, when it comes to market outperformance this year, it’s really driven by a handful of names. Part of the name included in your coverage list. Some of these valuations have been so extended that there has been talk of the fact that the momentum we have seen in the market simply cannot continue. What do you think of the tech industry outperformance we’ve seen so far?
Rishi Jalur: yes. And I think you have to pick a spot here. I think there are a lot of companies out there whose stocks are rising based on narratives of generative AI that will take longer than people expected to actually materialize. Or it’s because of the belief that the worst is over. With the macro environment deteriorating, now is the time to make recovery trades. I believe there could be some more macro softening before things really start to get better.
And maybe some investors are ahead of the curve here. On the other hand, I also have to say what is not priced into some of these stocks today. And for a company like Microsoft, we don’t know if all the gains from generative AI are actually priced into the stock price. I know it’s not fully in our model, but I don’t think most investor models have it.
And if Microsoft succeeds at its current pace, it would go from $0 in generative AI revenue to $600 million in generative AI ARR in two quarters. If this exponential pace continues, we may see some upward signs in the numbers. That’s why I say you have to be very careful with your spot selection. However, I feel that there are many brands that are ahead of the curve. And I would advise investors to remain cautious on these matters.
Diane Hall: Ok, just be careful. Okay, thank you Rishi Jaluria of RBC Capital Markets. Thank you for joining us today.
Rishi Jalur: thank you.
