{"id":11646,"date":"2023-07-28T11:05:17","date_gmt":"2023-07-28T10:05:17","guid":{"rendered":"https:\/\/www.gpbullhound.com\/?post_type=article&p=11646"},"modified":"2023-08-11T09:20:38","modified_gmt":"2023-08-11T08:20:38","slug":"tech-thoughts-newsletter-28-july-2023","status":"publish","type":"article","link":"https:\/\/www.gpbullhound.com\/articles\/tech-thoughts-newsletter-28-july-2023\/","title":{"rendered":"Tech Thoughts Newsletter \u2013 28 July 2023."},"content":{"rendered":"\n

Market: <\/strong>The busiest week of Q2 reporting was this week which drove stock performance, alongside the Fed decision and higher interest rates still creating volatility – particularly in Thursday\u2019s market moves. <\/p>\n\n\n\n

Portfolio: <\/strong>We didn\u2019t make any major changes to the portfolio this week. <\/p>\n\n\n\n

Big tech reporting this week <\/strong>and if last quarter was all about AI rhetoric, this quarter the debate is the extent to which AI monetisation and benefits is starting to be seen in the numbers.<\/strong> For Google and Meta, it\u2019s increasingly difficult to disentangle AI with their core business performance. To the extent that they can apply AI to their very large advertising businesses, they appear to be the biggest short term big beneficiaries of AI<\/strong>. Both are integrating AI into their advertiser tools to increase ad performance<\/strong>, which is resulting in higher spend to their platforms and accelerating revenues in Q2. Spend which went away as a result of lower performance in a post-ATT world (Apple\u2019s App tracking transparency – which effectively stopped the use of third party cookies used to track users across the web) is back, and<\/em> some – with AI tools around targeting and optimisation seemingly mitigating that ATT impact for advertisers. <\/strong><\/p>\n\n\n\n

For Microsoft, it\u2019s clear that monetisation will take longer<\/strong>, because unlike Meta and Google, Microsoft needs to explicitly sell a product.<\/strong> But Microsoft is in our view one of the clearest and biggest AI dollar opportunities in the market – As we noted last week, back of the envelope maths of $30 per user per month (the announced pricing for Copilot) applied to 400m office users gets to a potential incremental annual revenue of $144bn. That\u2019s like adding more than a Meta, and close to Google\u2019s search business – to your revenue base\u2026 Worth waiting for!! <\/p>\n\n\n\n

There was a continued theme from last quarter which is the amount of capex all of big tech are spending around building out their own AI capabilities. <\/p>\n\n\n\n

We think hyperscaler capex will amount to ~$160bn this year. There are still some questions being raised on how many AI chips will be available this year – reflected in comments from both Google and Meta around delays in server deliveries which we believe is related to Nvidia chips being sold out into next year. <\/strong><\/p>\n\n\n\n

For all of Microsoft, Meta and Google (Amazon will report next week) though, capex in 2024 is going higher, with more spending on CPUs and GPUs and servers related to AI.<\/strong> And as we\u2019ve said above it\u2019s incumbent on them to invest, for different reasons: for Meta it\u2019s about using AI to mitigate some of the advertising performance issues they had as a result of Apple\u2019s privacy regulations – as above, we think that\u2019s happening; For Google, largely the same; for Microsoft, AI leadership ensures they attract the next wave of new businesses into their software ecosystem and enables them to increase monetisation across a very large very sticky installed base. <\/strong>And foreach of Google, Microsoft and Amazon, selling Generative AI capabilities is one way they are trying to attract the next new growth customers to their cloud services<\/strong>. They are all in a race to invest, or risk falling behind. <\/p>\n\n\n\n

And when we think about each of Google, Amazon, Meta and Microsoft – they are all in a position to continue to invest – all have large cash balances and an ability to sustain high levels of investment over time. <\/strong><\/p>\n\n\n\n

In the portfolio we benefit from the capex spend on servers and network infrastructure through the semiconductor content – the servers that are used in training and inference have a huge amount more semiconductor content in them <\/strong>and are multiples the cost of standard enterprise servers: More and faster<\/strong> CPUs and GPUs through AMD and Nvidia, both of whom make their chips at TSMC, and further down the chain benefitting the semi cap equipment companies which are all needed to make these leading chips (we were seeing the early signs of more HBM AI memory spend amongst some of the semicap names reporting this week)<\/strong>. <\/p>\n\n\n\n

Elsewhere, cost cutting and better margins continues to be a feature of most of the results we\u2019re seeing – and tech overall<\/strong> is well placed to exercise cost control (typically high gross margins gives it a lot of flexibility in the cost structure) – that\u2019s one of the ways we think tech can drive earnings growth materially higher than the market this year and one of the things which keeps us optimistic overall. <\/strong><\/p>\n\n\n\n

Onto results: <\/p>\n\n\n\n

Microsoft AI monetisation requires patience.. <\/strong><\/p>\n\n\n\n