Ironstone Advisory Executive Briefing: Market Insights and Bold AI Capital Expenditures in H1–2024
By Rob Tyrie CEO, and Principal Consultant www.ironstoneadvosory.com
Introduction
It’s the summer of 2024. It’s August, I’m in Toronto and it’s hot and sticky. It’s good to see the markets freaking out and cooling off a little bit after the warm AI froth it’s been occurring and swarming. The stuff that’s on my mind after listening to Prof G Market update which they do every Monday. It’s like a big prompt for me.
Scott Galloway, so called Prof G by his students is capturing the business Zeitgeist of America I believe and he’s worth listening to. Along with that he was also party to one of the largest Zoom calls in history with 180,000 people chiming in about American politics and being unwoke, insufficiently profane to make people laugh as they think. It’s interesting to note that he convinced Mark Hamill a call and asked him to introduce him to the audience as if he was Luke Skywalker and Scott Galloway was Obi-Wan Kenobi... This is part of the reason I listen to this old white guy, on the fact that he is a world class marketer and educator and all in all a good writer in my opinion. His foil on the call is a brilliant researcher and writer named Ed Elson who was a young guy and provides laughter and some support for the mad crazy somewhat paranoid genius with erectile dysfunction which he sports like a cudgel to show how much he tells the truth about himself. Which, like a good writer and storyteller is just enough truth to mix in with the ideation.
This briefing provides an overview of the latest market trends and developments, with a focus on the significant increase in AI capital expenditures and the implications for software and insurance companies. The insights are based on the recent podcast "Prof G Markets," aired on August 5, along with additional research and news items related to the events discussed.
Market Vitals
- The market experienced a challenging July, but there were some advances.
- Bitcoin remains weak, and inflation continues to be a concern.
- China exposure is a potential risk for a significant portion of the S&P 500 or S&P 1000 companies.
- Delta Air Lines faced significant losses due to flight cancellations, potentially related to a Crowdstrike issue.
- Crowdstrike, despite recent declines, maintains a 95% retention rate due to market domination and integration with Microsoft.
- The U.S. economy is in a "Goldilocks" state, with 5.3% interest rates, 2.8% GDP growth last quarter, and 4% unemployment.
- Federal Reserve rates may be cut in September.
AI Capital Expenditures
- Microsoft beat estimates but experienced a decline due to cloud expansion costs.
- The company spent $19 billion on AI and cloud capital expenditures, contributing to a $200 billion spending race among Google, Amazon, Microsoft, and Meta.
- AI infrastructure companies are trading at high revenue multiples (150x), indicating strong demand for compute resources and the potential for oversubscription.
- Cloud vendors are expanding the replacement of data center infrastructure at an unprecedented scale, including new software services that leverage large language models (LLMs) for data organization and management.
- The key drivers are significant optimization goals, such as next-day or 48-hour delivery of goods, with companies willing to invest heavily in their businesses.
- Winners in this space may be those who engage in smart, big-game hunting with their capital expenditures, leading to asymmetrical results.
- Meta, one of the best-run companies in the world, reported revenue growth of over 20% for four straight quarters and a 73% increase in EPS, despite concerns about illegal drug ads on Instagram and the company's perceived anti-human and unconstrained practices.
Bill Ackman’s Failed Fund IPO
Bill Ackman’s IPO fund, initially targeting $25 billion, faced a series of reductions to $4 billion and then $2 billion before ultimately being cancelled.
- Investor negative feedback centered on Ackman’s overly political and anti-ESG approach, which proved too polarizing for a solid investment direction.
- Ackman’s use of Twitter for market research and feedback was a critical error, as the platform serves as an echo chamber that amplifies the views of a few influential individuals rather than providing a broad, representative sample of market sentiment.
Takeaways for Software and Insurance CEOs
1. Monitor market trends and developments closely, paying attention to the impact of geopolitical factors, such as China exposure, on your industry and company.
2. Consider the potential implications of the significant increase in AI capital expenditures on your business, both in terms of opportunities for leveraging AI technologies and the competitive landscape.
3. Evaluate your company's readiness to adopt and integrate AI technologies, focusing on areas such as data quality, talent acquisition, and ethical considerations.
4. Be cautious when using social media platforms, particularly Twitter, for market research and feedback. Develop a comprehensive, multi-faceted approach to gathering insights that extends beyond the echo chamber of social media.
5. Assess your company's risk exposure and insurance coverage in light of the recent high-profile losses and disruptions experienced by companies like Delta Air Lines.
By staying informed about market trends, carefully considering the implications of AI investments, and maintaining a balanced approach to risk management and decision-making, software and insurance CEOs can navigate the challenges and opportunities presented by the current market landscape.
What are the implications of ballooning AI capex on future market trends?
The ballooning AI capital expenditures (capex) by major tech companies like Google, Amazon, Microsoft, and Meta are likely to have significant implications for future market trends. Here are some key considerations:
1. Accelerated AI adoption: As these tech giants invest heavily in AI infrastructure and services, it will likely accelerate the adoption of AI technologies across various industries. Companies will have access to more advanced, scalable, and cost-effective AI solutions, lowering the barriers to entry for AI implementation.
2. Increased competition: The massive investments in AI by leading tech companies may lead to increased competition in the AI market. Smaller AI startups and niche players will need to innovate and differentiate themselves to remain competitive against the scale and resources of the tech giants.
3. Shift in IT spending: As companies recognize the potential benefits of AI, they may shift their IT spending priorities towards AI-related investments, such as cloud computing, data storage, and AI software and services. This shift could lead to a reallocation of budgets away from traditional IT expenditures.
4. Enhanced customer experiences: The adoption of AI technologies, driven by the increased investments, will likely lead to improved customer experiences across various sectors. AI-powered chatbots, personalized recommendations, and predictive analytics will become more sophisticated and widely deployed, setting new standards for customer engagement.
5. Productivity gains: As AI technologies become more accessible and integrated into business processes, companies may experience significant productivity gains. Automation of routine tasks, optimized decision-making, and improved efficiency could result in cost savings and higher output for businesses.
6. Job market disruption: The widespread adoption of AI may lead to job market disruption, with some roles becoming automated while new AI-related jobs emerge. Companies will need to focus on reskilling and upskilling their workforce to adapt to the changing job market dynamics.
7. Regulatory and ethical concerns: As AI becomes more pervasive, there will likely be increased scrutiny on the regulatory and ethical implications of AI technologies. Issues such as data privacy, algorithmic bias, and job displacement will need to be addressed by policymakers and companies alike.
8. Industry-specific transformations: The impact of AI investments will vary across industries, with some sectors experiencing more significant transformations than others. Industries such as healthcare, finance, and manufacturing are likely to see substantial changes driven by AI adoption.
9. Geopolitical implications: The race for AI dominance among tech giants and nations may have geopolitical implications, with countries vying for leadership in AI research, development, and deployment. This could lead to increased competition and collaboration on a global scale.
10. Long-term economic impact: The massive investments in AI by tech giants may have long-term economic implications, such as increased productivity, economic growth, and shifts in the labor market. However, the distribution of these benefits across society will depend on factors such as access to AI technologies, education, and government policies.
Software and insurance CEOs should closely monitor these trends and assess the potential impact on their industries and companies. They should also consider investing in AI technologies, reskilling their workforce, and developing strategies to leverage the opportunities and mitigate the risks associated with the AI-driven market shifts.
Rob Tyrie is an information technology professional with background in software programming design and architecture for Enterprise segments like Insurance, Wealth Management, Banking and other Financial Services. He has four decades of experience in building software and rolling out for human beings who use it and their jobs. Today he runs Ironstone Advisory, which is a consulting company that helps software companies enter insurance and banking markets with useful technology that is leading edge. He’s also a founder and managing director as well as CTO of the Grey Swan Guild, a virtual Think Tank. The Guild does events and specialized publications to help make the world a better place.
Search for his predictions and advice on LinkedIn using the hashtags #iaadvice and #iaprediction(s). He makes those prognostications on the regular basis. Some of them are right.
You can reach him on threads or most social media @RobTyrie or rob@ironstoneadvosory.com
