AI is powering a wild ride in the Nasdaq 100
The tech-dominant index is up ~40% YTD which stands out even more vs. the ~25% gain for Nasdaq’s equal-weighted cousin and only ~19% gain for the S&P 500.
Some equate the outsized relative gains to rate hike pauses and recession fears subsiding, others are simply pointing to the massive opportunity for big tech to take outsize shares of a massive AI market:
Big tech is a “torchbearer” for the stock boom around AI, says Dan Ives, managing director at US financial company Wedbush Securities, who predicts that spending on such ventures could reach as much as $800bn over the next decade.
“Heading into the second half of 2023, we see a much broader tech rally ahead as investors further digest the ramifications of this $800bn AI spending wave on the horizon” - The Guardian
Two of the biggest tech/SaaS names announced AI-driven price increases over the past 2 weeks driving a ~$120B of market cap gains:
Microsoft (~$100B increase). On Tuesday (7/18), Microsoft announced Microsoft 365 Copilot would cost an incremental $30/user/month.
Salesforce (~$20B increase since list price increase). The following day (7/19), Salesforce announced Sales GPT and Service GPT will both be priced at an incremental $50/user/month and includes a limited number of Einstein GPT credits. This comes just a week after they announced list prices would increase 9% across the board starting in August (7/11).
These massive gains (also helped by the likes of Nvidia and Tesla) are leading to a “special rebalancing” of the Nasdaq-100 today as big tech has officially become too big:
The Nasdaq-100 is getting rebalanced after its biggest tech companies got too big. The move was triggered earlier this month when the companies in the index with weightings exceeding 4.5% saw their combined weighting surpass 48%, according to Cameron Lilja, global head of index product and operations at Nasdaq. The rebalance, which takes effect Monday, will cap their combined weighting at 40% in accordance with the index’s methodology.
Shares of megacap tech companies have been on a tear this year, with Nvidia’s stock more than tripling and Tesla’s more than doubling. - WSJ
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Microsoft Copilot Pricing higher than expected
Satya Nadella was hyping up the opportunity for AI at the company’s Inspire event for partners:
“If you have an economy that’s around $100 trillion, we may have $7- to $10-trillion more of GDP growth driven by this next generation of AI technology,” Nadella said, describing it as “a massive partner opportunity.” - GeekWire
“Look, we are already as an ecosystem participating in a $4 trillion opportunity that could in fact, grow by another 50 percent,” Nadella said. “So that means approximately $2 to $2.5 trillion dollars of additional TAM is going to be addressable by all the innovation across our partner ecosystem.” - CRN
The $30/month price tag was well above Street expectations with Morgan Stanley noting the list pricing supported ~40% upside to their original base case:
Our original monetization framework yielded a $10 billion Base Case Office 365 Copilot opportunity in FY25 based on a 100% uplift to an ex-Copilot average ARPU of $113 (projected for FY25) for Office 365 and a 20% penetration of installed base.
A 20% Copilot penetration of this eligible installed base of users at $30/month ($360 ARPU) implies M365 Copilot revenue of ~$13.9 billion, or ~40% upside to the $10 billion Base Case from our first pass
Bottom line, today's pricing, based on the value proposition of the technology, is higher than most expected and represents a more bullish opportunity for Microsoft.
Other analysts across the street were universally excited by the pricing announcement with many increasing their price targets on the news:
Mizuho Securities analyst Gregg Moskowitz said the news of the $30 per user per month add-on for Microsoft 365 Copilot could boost revenue by fiscal 2025 by as much as $9B, assuming 20% of customers sign-up for the voluntary add-on, or $19B, if 40% of them do.
Moskowitz, who also boosted his per-share price target to $420 from $390 following the news, added that Mizuho is confident on the company's growth opportunities, including "significant" monetization of its generative artificial intelligence capabilities.
Barclays analyst Raimo Lenschow wrote in an investor note that the pricing announcement "suggests that the product is finally ready for prime time" and that it is a "major next step for MSFT’s AI monetization."
TD Cowen analyst Derrick Wood, who also boosted his per-share price target on Microsoft (MSFT) to $390 from $330, said that he expects Microsoft's (MSFT) generative AI capabilities to offset some mixed demand data points. - Seeking Alpha
Salesforce leaning into Einstein GPT Trust Layer
Salesforce has announced a flurry of AI-related products and associated price increases over the past 5-6 weeks with a heavy focus on Trust and Governance.
June 12th: Announced AI Cloud
AI Cloud will enable sales reps to quickly auto-generate personalized emails tailored to their customer’s needs, and service teams to auto-generate personalized agent chat replies and case summaries. Marketers can auto-generate personalized content to engage customers and prospects across email, mobile, web, and advertising. Commerce teams can auto-generate insights and recommendations to deliver customized commerce experiences at every step of the buyer’s journey. And, developers can auto-generate code, predict potential bugs in code, and suggest fixes.
June 29th: Announced Sales GPT and Service GPT at World Tour London: AI Day
Sales GPT will embed generative AI in the flow of work, auto-generating customer emails, call summaries, account research, and more. Service GPT will auto-generate service replies, automatically summarize customer interactions into easy-to-access knowledge articles for service teams, and better prepare field service agents before they arrive at service locations.
July 11th: Announced 9% average list price increases
Salesforce’s last list price increase was seven years ago, and since then the company has delivered 22 new releases, thousands of new features—including recent generative AI innovations—and invested more than $20 billion in research and development.
July 19th: Salesforce Announces General Availability and Pricing for Service GPT, Sales GPT
Sales GPT is included in Sales Cloud Einstein at $50/user/month and includes a limited number of Einstein GPT credits.
Service GPT is included in Service Cloud Einstein at $50/user/month and includes a limited number of Einstein GPT credits.
As usage grows, customers can purchase Enterprise Expansion packs for Sales and Service teams.
Initially, only customers who have purchased Unlimited Edition, which includes the Einstein SKU, will be eligible to use GPT-powered capabilities.
Kathy Baxter, Principal Architect of Ethical AI Practice at Salesforce was on Bloomberg discussing the importance of AI to fight biases and how consumers need to be able to make informed decisions when interacting with AI.
Bob Evans questioned the possible competitive impacts from Oracle and SAP in a crowded market with software companies hungry to take share:
Oracle and SAP are looking to position their CX offerings as superior to those of Salesforce by virtue of their adjacency to the ERP and supply chain apps and data that are central to the app businesses of those rivals. And, Oracle in particular has been attempting to position Salesforce as a tool that tells sales managers what’s happening in the field, while Oracle CX can actually help salespeople sell more. - Acceleration Economy
We believe companies will continue to do business with partners who offer real value. Today’s business leaders need intelligence and agility to meet rapidly changing customer expectations and market conditions. What differentiates SAP and our intelligent CX solutions in this crowded field is our ability to deliver value by bringing together disparate data insights from across the entire enterprise. Whether consumers are buying or subscribing, or they already own or use a product or service, SAP provides our customers with solutions that align to every touchpoint of the consumer journey and delivers amazing customer experiences, every time.” - Ritu Bhargava, President & CPO for SAP Industries & CX via Acceleration Economy
With Blessings of Strong NRR,
Thomas