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IT Spending and the AI Boom: A New Normal for Software Companies?
As the enthusiasm for artificial intelligence (AI) continues to surge, skepticism about its immediate impact on enterprise IT spending draws attention. Recently, a report from Guggenheim highlighted a potential “new normal” in software company revenues. According to lead analyst John DiFucci, the growth in enterprise budgets is unlikely to reaccelerate soon, based partly on data from tech researcher ETR. July's IT budget growth expectations have remained consistent with last year's figures.
The AI Spending Phenomenon
The current AI spending boom, exemplified by Nvidia's substantial sales increases as companies enhance their data center capabilities, hasn't yet translated into significant software spending, DiFucci argues. This is due in part to the high cost and the lingering uncertainty about AI's practical uses for companies. While enterprises may eventually invest in generative AI (GenAI), this shift has not occurred yet. Presently, most AI expenditures are by AI companies and public cloud providers preparing to handle AI workloads.
The Uncertain AI Future
DiFucci suggests that although companies could eventually purchase AI tools like Copilots or develop their own large language models (LLMs) as costs decrease, this is not the current trend. Importantly, there is no evidence that businesses are delaying IT investments today in anticipation of future AI spending. Instead, the challenging IT spending environment seems to persist independently of AI expectations.
A Long-Term Perspective
Companies such as Microsoft, Alphabet, and Meta are adopting a “build it and they will come” strategy, which may prove lucrative eventually. Despite some analysts' declarations that this is the year AI will demonstrate its practical value, the precise benefits remain unclear. DiFucci believes that nearly half of the software companies he monitors might need to recalibrate their revenue forecasts linked to AI. This includes notable firms like Palo Alto Networks, Salesforce, and Workday.
Looking Towards 2025
Many corporate leaders are ready to assert the existing use of AI within their operations and those of their clients. However, as Jefferies' Brent Thill has indicated, significant AI-related revenue may not materialize until 2025. Until then, companies are likely to scrutinize AI's value closely before loosening their purse strings for substantial investments.
Overall, the speculation around AI's impact on IT spending highlights a cautious stance among corporations. As they evaluate the true utility and return on investment of AI technologies, software companies may need to adjust their expectations and strategies accordingly.
