Artificial intelligence has finally given a new boost to ailing software stocks. Wall Street has been looking all year for the biggest beneficiaries of the AI wave sparked by the launch of ChatGPT: now it’s the turn of a group of companies that were laid aside in the wake of the pandemic tech boom.
Software companies should be in a good position to provide both the tools companies need to build generative AI into their business processes, and to embed it in the applications millions of employees use in their daily lives. But it’s not at all clear who will find the best uses for the technology, or how they will charge customers.
A spike in the shares of two companies that have struggled to grow consistently since their recent listing highlights both hope and uncertainty. Shares of Palantir and C3.ai have roughly doubled since early May as they each tout themselves as providers of the technical platforms needed to leverage generative AI.
However, such companies will compete with giants like Google and Microsoft, and the revenue implications are completely opaque. As Palantir CEO Alex Karp told his investors last month, “We don’t have a pricing strategy” for generative AI. The theory: If the new AI services are as good as the company says, customers will be happy to pay one way or another.
There will be a lot of competition. Generative AI’s plug-and-play nature – anyone can use the large language models created by companies like OpenAI – has made the technology readily available to any software company.
The risk is clear that vendors will rush to add AI bells and whistles to their existing products without thinking about the true benefit of the technology. And if every email provider offers automated text suggestions when you write a message, the feature will quickly become commonplace, making it difficult to convince customers to pay a premium.
There is an added risk that if AI actually makes employees more productive, it could reduce the amount of software customers buy. This is the question facing companies like GitLab, which is used to create and deploy software. Like many software companies, GitLab charges based on the seat or number of people using its service. If AI makes developers more productive, will customers need fewer and pay for fewer seats?
Sid Sijbrandij, CEO of GitLab, tried to shrug off that concern this week, arguing that if AI lowers software production costs, more software will be made. Wall Street liked what it heard. GitLab’s shares rose by a third after it announced good results and outlined its plan to implant generative AI into every facet of its service.
The threat of user-based pricing and the potential difficulty of persuading customers to pay a premium has led many software companies to explore the idea of consumption-based charging: the more customers adopt new AI features use, the more they will have to pay. This also has the advantage that revenue is directly linked to the use of a service with high computer costs.
In the short term, however, this brings with it the kind of uncertainty that investors usually dislike. C3, for example, has blamed a drop in residual revenue from existing contracts — usually a key indicator — on its shift to usage-based pricing. The decrease is clear, the impact of a future increase in turnover is uncertain.
The uncertainty is compounded by a short-lived dip in profit margins. Most software companies are starting out cautiously, offering new AI features for free as they figure out which ones are catching on and how best to charge them.
In an interview with the FT’s Cristina Criddle this week, Adobe chief Shantanu Narayen compared this to previous technology platform shifts. He predicted an eventual shakeout of the many venture-backed AI companies that have emerged that lack a clear business model. However, previous platform shifts brought prolonged uncertainty before the winners emerged.
Investors are already betting that established companies like Adobe will be in a strong position to ride the AI wave as shares are up 30 percent this year. Similarly, shares in ServiceNow, another established cloud software company that has talked about adding AI to many of its services, are up about 40 percent this year. But such companies still need to demonstrate that they produce real value and not just act as resellers of the generative AI produced by companies like OpenAI.
richard.waters@ft.com
