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AI inverts tech’s growth and value buckets

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The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Pranav Kiran

TORONTO, June 14 (Reuters Breakingviews) -Artificial intelligence is forcing an opposite day in the technology industry. As the software boom’s easy growth fades, investors are punishing once-racy and now-slowing giants like Salesforce CRM.N. Yet aged rival Oracle ORCL.N, once valued at a discount to boss Marc Benioff’s software company, is currying new favor on the back of AI-boosted demand. The switch-up is much more than a machine-generated hallucination.

The release of OpenAI’s ChatGPT in late 2022 brightened tech’s waning star after a brutal post-pandemic comedown. The previous big wave, software-as-a-service - the practice of selling subscriptions to use applications that run in the cloud - was no longer easy money. Now that it has gobbled up half of the $915 billion spent on software globally in 2023, according to Gartner, growth rates are down. The average pace of revenue expansion among Software Equity Group’s SaaS index halved between 2021 and last year.

That dropped an increasing number of listed tech firms into a bucket investors label “value” - that is, trading at relatively meager multiples of earnings or sales, often because future growth prospects look dimmer. SaaS companies specifically saw their average valuation as a multiple of sales fall from 6.4 times in 2021 to 3.8 in 2023, according to SEG’s data.

The AI boom's new burst of enthusiasm isn't about software. Instead, when OpenAI or Elon Musk-backed xAI pour money into training self-learning models, they’re spending largely on data center capacity from companies such as Amazon.com AMZN.O, Microsoft MSFT.O, or Alphabet GOOGL.O. That spending is set to exceed $200 billion by 2028, according to Dell’Oro Group.

Though also a SaaS giant, Oracle has benefitted from this infrastructure gold rush as it builds a slew of new data centers. While financial results released Tuesday missed analysts’ expectations, the stock soared the following day, adding about $45 billion to Oracle’s market value, on the strength of future expected billings - the kind of response typically seen among “growth” companies, value’s opposite.

It’s a big reversal of fortune, especially compared to software-focused Salesforce. Once trading at a meaningfully higher multiple of expected sales than Larry Ellison’s much older firm, Salesforce’s valuation has now converged, according to Visible Alpha. Worse, Salesforce lost $50 billion in market value after disappointing earnings - and, crucially, weak forecasts - in May. It makes sense: Investors are clearly hungry for growth, and Salesforce’s is now expected to trail Oracle’s. This opposite day will be a long one.

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Oracle reported on June 11 that total revenue was up 4% in constant currency to $14.3 billion for the three months ended May 31. Analysts on average expected $14.6 billion, according to estimates compiled by LSEG.

Fourth-quarter adjusted earnings came in at $1.63 per share, below the $1.65 that analysts expected.

Despite these misses, remaining performance obligations - a measure of future expected revenue - rose 44% year-on-year to $98 billion in the quarter. Oracle has seen rapid growth in its cloud infrastructure unit, propelled by deals with customers including Elon Musk-backed xAI and ChatGPT maker OpenAI.

Graphic: Cloud-based software is reaching a saturation https://reut.rs/4aZMTqc

Graphic: Tech firms were slipping into the “value” bucket https://reut.rs/3VoULLT

Editing by Jonathan Guilford and Sharon Lam


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