Hardware companies with AI-related products have experienced tremendous growth, while software companies with B2B exposure have encountered softer demand and weaker-than-anticipated guidance. The higher demand for hardware products can be attributed to the market’s investment in infrastructure, akin to buying the gardener’s main tool \u2013 the spade. This disparity in performance is evident in the past two years’ ETF data, where the SMH Index (hardware) surged by +130.07%, whereas the XSW Index (software) saw a more modest increase by +27.06%. While the technology market is experiencing a dynamic interplay between hardware and software, we have seen an emerging shift into software.\u00a0<\/p>\n\n\n\n
The weaker-than-anticipated guidance seen among software companies is primarily a result of the following factors:<\/strong><\/p>\n\n\n\n Workday, Q1 2024 – Carl Eschenbach, CEO & Director:<\/strong>\u00a0\u201cAnd we are seeing customers committing to lower headcount levels on renewals compared to what we had expected. We expect these dynamics to persist in the near term, which is reflected in our revised FY 2025 subscription revenue guidance.\u201d<\/em><\/p>\n\n\n\n Salesforce, Q1 2024 \u2013 Brian Millham, President & COO:<\/strong>\u00a0\u201cWe continue to see the measured buying behavior similar to what we experienced over the past two years and with the exception of Q4 where we saw stronger bookings. The momentum we saw in Q4 moderated in Q1 and we saw elongated deal cycles, deal compression and high levels of budget scrutiny.\u201d<\/em><\/p>\n\n\n\n Whether individually or collectively, these factors are constraining enterprises from increasing their spending pace, resulting in weaker billings that have negatively impacted many software stocks.<\/p>\n\n\n\n Weaker billing \u2013 a problem or not?<\/strong> Will a higher average sales price offset less users?<\/strong> Why is highly normalized and federated data important?\u00a0<\/strong> Therefore, we believe that companies specializing in data observability and data structuring are in a favorable position. In the first quarter, we observed an increase in current remaining performance obligations (cRPO) for companies like Snowflake and Datadog, indicating that enterprises are actively reserving capacity with them.\n
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We question whether weaker billing is indeed a problem, as this remains to be demonstrated. While weaker billing is seen as a higher risk that could lead to churn, it is not necessarily an absolute issue. It is crucial to recognize that enterprises face substantial switching costs when transitioning software solutions, involving significant expenses and time investment. Additionally, the hesitation of enterprises to invest in new (AI) technologies, fearing that these products may become outdated quickly, is a factor to consider.<\/p>\n\n\n\n
As enterprises take a cautious approach towards future headcounts, we aim to look beyond companies with pricing models based solely on the number of users. Instead, we focus on those incorporating a consumption-based pricing component. Additionally, we distance ourselves from companies that we believe will not be able to develop an AI solution capable of commanding a higher average sales price (ASP) to offset fewer users. We believe that companies offering leading AI solutions can gain market share from those that cannot and achieve a higher ASP for their products, thereby compensating for lower sales volumes.<\/p>\n\n\n\n
What we know is that AI solutions require substantial amounts of data, which underscores its growing importance. Another crucial aspect is the need for highly normalized and federated data to train AI models effectively. The more well-structured the data is, the better AI can be deployed for generative purposes. Much like hardware, structured data for AI model training serves as infrastructure in the AI space \u2013 essentially another piece of equipment during the \u2018gold rush\u2019.<\/p>\n\n\n\n
In addition, cloud companies like Amazon (AWS), Alphabet (Google Cloud) and Microsoft (Microsoft Cloud) are benefiting from the same trend, and we started to see an accelerated revenue growth among their cloud solutions in Q1.<\/p>\n\n\n\n