How is AI Impacting Software? Jarvis Update September 13, 2024: Live from the 2024 SaaStr Conference

There are many investment trends underway in software. Software stocks struggling this year. Are there exciting opportunities for 2025 and beyond? We answer this question and much more in this week's Jarvis update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. And this week, Nolan's coming to us live from sunny San Mateo, California, and the SaaStr conference. Nolan, welcome to the program.

Hey, Brian, it's great to be here. I wish I was outside in the sunshine, but because of us recording and technology, I'm actually inside. So happy to be here today sharing my thoughts on SaaStr.

Before we get started, a quick preview for you. Nolan's going to be sharing his findings with us from being out at the SaaStr conference. That's the Software as a Service conference. We're going to have two topics for you as we usually do. The first is going to be a quick recap of the conference, and then our second point is going to be takeaways and trends for investors. And Nolan, first question for you: What made you decide to attend SASTR this year?

Growth. Part of what we've always done with clients is we're trying to spot winners. Our clients hire us, and one of the things that they want us to do is produce growth. And a lot of clients need it. Whether you're retired or not retired, most people want to see their account values grow and their standard of living improve. One of the ways to do it is participating in the capital markets here in the US. Uh, we're generalists, so we're very interested in sectors that can, uh, move the arrow for clients. So that's what brought me here to see what's happening in software and in growth land.

We'll jump right into the topics. So topic 1 is recapping SaaStr. Again, this is the Software as a Service conference, SaaStr, out in California. Would like to ask you first, Nolan, what companies are out at SaaStr this year? And who have you had the opportunity to speak with?

So a lot of the big names you would expect, a lot of the big tech behemoths are here. IBM, Google is here. They have a big, big presence here. Oracle Cloud is here and Booking.com. Those are some of the larger ones. I've been more interested in— once it piqued my attention to some of these smaller mid-cap companies that we've been following. So I just heard our big interview with Rene Lucerda, who's the CEO of Build.com. And another one who's a recent IPO is Klaviyo. Uh, they spoke yesterday. So those are some of the ones that have, uh, that I've paid attention to that caught my attention.

Tech, especially software, has been on a roller coaster ride over the last year, specifically software. The stocks have struggled in software and revenue growth has been challenged. Of course, we know there's a correlation between revenue growth and stock prices. Uh, so I wanted to know, Nolan, what have you learned about the state of the software business right now? Has anything surprised you out there?

If you go back to 2021, which is post-COVID in that February, March timeframe when interest rates started rising, it really had a big negative impact on, on tech in general and software specifically, not necessarily from a business standpoint. They first showed up because the stock prices started decreasing when interest rates went up and valuations compressed. Businesses held in there. Then we went through the supply chain issue. A lot of these companies in software, you can go back to 2022, 2021, and you can still find some real good quality companies that stock prices are halved and sometimes more since that timeframe. And a lot of them haven't really recovered yet. One of the things that, um, we hear on these earnings call, you know, in my Nolan's Notes this year, I mentioned 10 is the new 20, meaning that these growth rates of some of these software companies, which were 30, 40, 50% several years ago, now some of these companies are struggling for any positive revenue growth. And some of them are posting mid-single-digit growth. And so one of the things that has been interesting being at the conference, hearing from these companies directly, and we find out the struggle is real. You know, what started out as a consumer struggle a couple of years ago with inflation crimping consumer spending has really manifested itself in the business arena, small, mid-sized businesses all the way up to enterprises. So spending from the corporate standpoint and the software and other areas has definitely been impacted. Growth rates have slowed in software, which is part of one of the reasons that the companies have struggled somewhat.

Kind of to that point, Nolan, we've been reading a lot of these conference calls over the last couple of years, but it's been harder for companies to close deals with enterprise customers. What have you heard out there about deal flow for these companies and any trends with respect to customer trends and customer behavior out there?

The customer scrutiny on closing deals is real. So there's some positives and negatives to draw from that, but it— these aren't company-specific issues. So a lot of times on these earnings calls, you'll hear a company come out, they'll report earnings, the market will get disappointed, and the stocks may fall 15, 20, 20% sometimes. And in most cases, the majority cases, these aren't company-specific issues. It's just what's happening in the industry right now. There's certainly a slowdown on spending. From a technology and software standpoint. Some of it has to do with AI and cloud, which we'll talk about here in a second. But the slowdown is real. The question for us as investors is, is it temporary or is it permanent? And that's what we're trying to suss out. Excellent.

So let's move on to topic 2. So topic 2 is the trends and the takeaways from the conference. Well, and of course you're at SaaStr not only to see if there are software, pieces of software that can augment our business and what we do here and also how we serve clients, but also to put an ear to the ground With respect to emerging themes for investors, we've read on many software and other conference calls that AI is a theme that's dominating tech right now. What have you learned about AI this week? And do we think AI is a friend or a foe for software companies?

I think that's the million-dollar question. So AI is affecting software in many ways. The big one is spending. Corporations, they cannot afford to be left behind in the AI race. And that has been repeated by every CEO who has presented or spoke at the conference. AI is definitely at the beginning, but the spending for AI has increased dramatically. I think Larry Ellison, the Oracle CEO, when they came out with earnings earlier this week, mentioned— I think he mentioned something like $100 billion is the price tag to enter the AI race. Not a lot of companies have it. But you cannot afford to be left behind. And so what that means is companies have to spend. And yes, you have to spend on AI before the revenue shows up. So I think there's a crowding out of spending. There's only so much money companies have to spend in this tech bucket generally. And if you're getting suffocated by all the AI spend, that means other areas right now are being put on the back burner. And unfortunately, software temporarily, it looks like, is one of those areas that's getting left behind right now because of the AI spend. As far as whether it's friend or foe, I think that's a really good question. And that's what us and all these investors need to figure out. Definitely there is some amount of cannibalization that's going to happen between AI and software. I know we've heard stories of AI actually teaching itself how to code. And so there's going to be some software that's going to go the way of the buggy whip because of AI. Most software companies are actually embracing AI to make their tools more efficient. And so there's going to be some winners and some losers. You know, a couple of names we follow, ServiceNow being the big one, embracing AI and having AI actually help them produce revenue and decrease costs. There is a certain amount from businesses that will be able to take on AI and decrease their headcount or their spend. So we know that there's going to be some margin improvement as companies use AI. So yes, there'll be some winners, there'll be some losers. We definitely want to be on the side of finding and locating and buying the winners.

And then tell me a little bit more, Nolan, about cloud computing. That's obviously a theme that's been big over the last 5 or 10 years. What are we hearing about what's going on with cloud computing these days?

So cloud computing is here to stay. Not a lot of talk about changes made to cloud computing. One of the things that cloud computing happens in the data center and the data center cloud needs to get ready for AI. So there is a huge spin for these data centers to be AI ready. So that means routing, switching, data chips, and it's a whole new architecture. Jensen Huang from NVIDIA told us it's about a trillion-dollar spin. Of course, we follow a company, Arista Networks, has been a huge beneficiary of this changeover. So we think cloud computing will continue. There will be some spend that needs to happen to keep cloud computing at the forefront, but definitely that trend is still intact.

And then Nolan, are you having— do you have any other takeaways for other areas of tech beyond just AI and cloud computing?

Yeah, there's a few for me. One is the US is still just such a dominant place for tech. Now I've met several CEOs and startup companies and other executives that came here from other countries. Latin America and Europe comes to mind. And I was having lunch yesterday with a tech startup, one gentleman from Estonia and another lady from Germany that had come here. And at lunch, one of the things that they told me is, hey, I love being here in the US and this type of thing couldn't happen in Germany or in Europe. And so I pressed them. I said, well, what do you mean? What couldn't happen in Europe that's happening here? They said, you know, all the excitement, The new innovation. They said our societies, they really don't promote that. And if you're there and you are doing something great, most of society will really cut you down and discourage you from startup or from innovation. And so they love being here just because of the energy, the idea flow. So one of the things that really impressed on me is, hey, that American flag and that US passport. You know, innovation will happen here. There'll be a lot of consternation because of the election coming in about 60 days, but the American innovation and our system of capitalism and creating winners is live and well. So that's one of my, definitely one of my takeaways. I think the other thing, most of this conference is geared towards small and mid-sized businesses, either companies that are starting up innovating or companies that are small and still growing. Some of the companies are public, some of them aren't public yet, and some of them want to grow to be these big behemoths. Even though that there's a, a tough cycle right now in software, there are definitely some winners and some companies that are doing exceptionally well, and it may not show up in their stock price today, but there's some companies that are doing exceptionally well. It's much harder to tell if you go to a, um, you know, a timeframe like, uh, 2020 or the last tech revolution where all companies seem to be doing very well, that rising tide that lifted all boats, it's much tougher to find out who the real diamonds in the rough are. But when the seas get really rough and companies are still doing well and still growing, they're much easier to spot.

And we're gonna close it out here, Nolan, with the last question. I know you're there looking for investment ideas. Have you walked away with any new investment ideas or at least some companies or segments of the market that you wanna study in detail as we look for ideas to put in client accounts.

Yes, yes, and more yes. And you asked about winners. I think more importantly, Brian, what really has my attention are losers and staying away from losers. And there's a lot of businesses here, you know, as I go through the exhibit booths and see businesses, you know, there's a lot of saturation in tech and in software because it's tougher now. They're easier to spot. So a lot of these payments companies, bookkeeping, compliance, there's a lot of these analytic layers where maybe you have tech, you have AI, you have software, but then you need these companies that, that kind of layer on, on top of that, that, that tends to be very saturated, not a lot of differentiation. I think those companies are going to be, going to have a tough time. The other thing that I've learned, I'll get to the specific names in a second, is there's a lot of point product or point solutions. You know, hey, you're a company ABC and you do this one thing. But if you're running a company, you may have 50 needs and you can't have 50 vendors, one for each need. So companies are demanding platforms. And so you're going to continue to see more consolidation. And you asked about winners. One of the companies that we followed years ago that Right. You know, for our retail clients and our wealth management clients, too small to buy yet. But you know, we have a private investment vehicle that, that we do have shares and that's Bill.com. And Bill.com helps small and midsize businesses with accounts payable, accounts receivable, kind of the blocking and tackling of running their business. But several years ago they got into the, uh, the payments and the charge space by buying a company called Divvy. And one of the things that was mentioned is this is helping them create a platform. So before they just had one tool for one solution. But companies have great kind of payment and accounting needs, kind of run the gamut. And so I think this platformization where companies maybe are helping clients in multiple areas with one pane of glass or one dashboard, I think they're going to become more valuable to companies. And I think they'll be rewarded with higher revenues, higher market shares, and ultimately higher, higher stock price. So those are the things I'm really paying attention to. There are some smaller companies and publicly traded companies. Klaviyo is one. We haven't done work on it yet, but we will be sending that one off to our analysts to take a look at. Bill.com, I mentioned earlier. Adyen is here. There's another payment company that competes with Stripe. And so there's quite a few names that we'll have on our shopping list. To do a deeper dive on.

Very nice, Nolan. We're going to leave it there. We appreciate you being on location with us. A lot to share, really impressive. For those of you who are new, we'd like to ask you to like and share the video if you found this useful. It does help us. It also helps you if you, if you subscribe and hit the bell for notifications. You find out every time we're out with a new video. That's every couple of weeks. We're talking about the markets, we're talking about planning topics, and a lot of other ways to grow your wealth. We appreciate all the new viewers.

And Nolan, thank you for being with us, and we'll see you again next time.

[MUSIC] [MUSIC]