Artificial intelligence is finally breathing life into dying software stocks. Wall Street has been looking all year for the biggest beneficiaries of the artificial intelligence wave sparked by the launch of ChatGPT: Now it’s the turn of a group of companies that have been put on hold in the wake of the pandemic tech boom.
Software companies should be in a good position to both provide the tools companies need to build generative AI into their business processes and embed it in the applications that millions of workers use in their daily lives. But it’s unclear who will find the best use for the technology, or how they’ll get customers to pay.
The surge in shares of two companies that have struggled to sustain growth since their recent listings underscored both hope and uncertainty. Shares in Palantir and C3.ai have both roughly doubled since the start of May, as they both tout themselves as providers of the technology platforms needed to harness the power of generative artificial intelligence.
However, a company like this will compete with giants like Google and Microsoft, and the revenue impact is completely opaque. As Palantir CEO Alex Karp told his investors last month: “We don’t have a pricing strategy for generative AI.” Theory: If the new AI service is as good as the company says it is, customers will be happy to pay in one way or another.
There will be a lot of competition. The plug-and-play nature of generative AI—anyone can take advantage of the large language models created by companies like OpenAI—makes the technology immediately available to every software company.
An obvious risk is that vendors will race to add AI capabilities to existing products without considering the true benefits of the technology. Plus, if every email provider offered automatic text suggestions as you compose a message, the feature would quickly be seen as commonplace, making it hard to convince customers to pay extra.
There’s an added risk that if AI does make workers more productive, it could reduce the amount of software customers buy. This is the problem facing companies like GitLab, which is used to create and deploy software. Like many software companies, GitLab charges by seat, or the number of people using its services. If AI makes developers more efficient, will customers want fewer developers — and pay for fewer seats?
GitLab CEO Sid Sijbrandij tried to brush that concern aside this week, arguing that if AI lowers the cost of producing software, more software will be created. Wall Street likes what it hears. Shares of GitLab rose by a third after announcing solid results and outlining plans to embed generative artificial intelligence into every aspect of its services.
The threat of user-based pricing and the potential difficulty in convincing customers to pay a premium has led many software companies to explore the idea of a consumption-based fee: the more customers use new AI capabilities, the more they earn. pay. This also has the advantage of tying revenue directly to usage of services with high computational costs.
In the short term, however, this creates the kind of uncertainty investors typically hate. C3, for example, blames the decline in residual revenue from its existing contracts (often an important metric) on the fact that it is moving to usage-based pricing. The decline is clear, and the impact of future revenue growth is uncertain.
Adding to the uncertainty will be a short-term decline in profit margins. Most software companies start cautiously, offering new AI features for free while researching which features will catch on and how best to charge for them.
In an interview with the Financial Times’ Cristina Criddle this week, Adobe chief executive Shantanu Narayen compared this to previous technology platform shifts. He predicts that many venture-backed AI companies that have sprung up without a clear business model will eventually face a reshuffle. However, previous platform shifts have created long-term uncertainty before a winner emerges.
Investors are already betting that established companies such as Adobe will be well-positioned to ride the AI wave, with their shares set to rise 30% this year. Likewise, shares of ServiceNow, another veteran cloud software company that has been talking about adding AI to many of its services, is up about 40% this year. But companies like this still need to prove that they create real value, and not just act as resellers of the generative AI produced by companies like OpenAI.
richard.waters@ft.com