4 tech giants have cemented their AI dominance. But there’s even more room for growth

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Four cloud service and software providers in our portfolio are poised to be generative artificial intelligence winners as the companies commercialize access to the new technology. Their already leading positions in the field should, in turn, generate even higher revenue that translates to higher stock prices. Oppenheimer’s first-ever generative AI budgeting survey, which polled 50 chief technology officers and information technology decision-makers, shows Club names Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOGL) as the top three vendors expected to gain the largest amounts of market share from future company increases in AI spending. Among the others was Salesforce (CRM) at No. 7. Other high-level takeaways from the Oppenheimer survey include: 75% of tech companies already currently use generative AI, which creates human-like text as well as visual content from user prompts. Nearly all tech companies will integrate generative AI by the end of 2024. 94% of survey respondents said they would pay up to 30% more for AI-embedded products. 68% expect AI and machine learning to increase 10% within the next 12 months. Respondents said they expected to use generative AI for customer support, content generation and productivity. Large cloud service providers, often referred to as hyperscalers, represent 92% of enterprise spending in generative AI, according to the survey. Amazon Web Services (AWS), Microsoft’s Azure and Google Cloud are by far — and in that order — the largest hyperscalers. From a software-as-a-service (SaaS) perspective, Salesforce is a leader in customer relationship management technology, including cloud. Microsoft Azure In Oppenheimer’s survey, 70% of CTOs see Azure as the cloud most likely to gain future AI spending at their organizations. Microsoft has accelerated its market share gains in the cloud market this year through its investment in OpenAI, the creator of the popular large language model ChatGPT. This partnership has helped Microsoft grow its cloud ecosystem by expanding its innovations in AI on top of Azure. The tech giant has been adept in offering AI-embedded products, new tools, and features for Azure. This allows the company to offer higher prices for these services. This pricing power through leveraging the latest technology developments along with the recurring revenue it delivers from subscriptions is a key reason why we like to company. In a separate note, Piper Sandler flagged Microsoft as its “highest conviction” large-cap stock to own through the end of 2023. The analysts see Microsoft as having a “first-mover advantage in generative AI,” citing the general release of Microsoft 365 Copilot on Nov. 1. Copilot is marketed as an AI assistant that utilizes user data from emails, meetings, documents, and chats to solve problems at work. Copilot will be priced at $30 per user, per month, to help commercialize its AI-powered cloud services. Piper was particularly encouraged by third-party web data, which revealed a “sharp” 181% month-over-month increase in unique visitors that could be preparing for Copilot adoption. The analysts have an overweight (buy) rating on Microsoft stock and a $400-per-share price target. We like Piper’s call, which is why we’ve been buying Microsoft on recent pullbacks since its last reporting quarter. Amazon Web Services AWS is preferred among businesses, according to the Oppenheimer survey. Forty percent of respondents see putting increased AI spending into the cloud leader. The analysts viewed AWS in light of the survey results as “better positioned than we expected.” They pointed to Amazon’s $4 billion investment in AI start-up, Anthropic, the availability of its Bedrock and Titan large language models, and its support for Llama 2 foundation models developed by Meta Platforms (META) as having “fortified its base” in the competitive generative AI race. Google Cloud Google Cloud was the third most likely cloud provider in Oppenheimer’s survey to gain future AI spending share. Users favor the company’s multiple AI capabilities through Vertex AI, Enterprise Search and Conversational AI. We think Alphabet’s cloud business doesn’t get the attention it deserves. At the Google Cloud Next 2023 conference back in July, the company cited 70% of generative AI unicorns including Cohere, Jasper and Typeface, are Google Cloud customers. According to the Oppenheimer survey, a boost in company spending on AI technologies is expected to “weaken the competitive moat for most horizontal SaaS/application software vendors.” About a third of survey respondents said application software, including SaaS, as areas of the IT budget is “likely to contract from deploying AI technologies.” Club holding Salesforce comes to mind here, which is a leader in the SaaS marketplace. But not all application software is viewed equally. Salesforce and AI Oppenheimer analysts said they see “durable tailwinds for customer support, content generation and code generation, which are considered priority use cases for Generative AI.” Against this backdrop, the analysts have a “bullish tone” for Salesforce, in addition to Adobe (ADBE) and ServiceNow (NOW), calling them “the greatest beneficiaries of accelerating Generative AI adoption.” We agree with this call and are in the camp that Salesforce’s generative AI tools should help reaccelerate sales growth all while balancing increasing margins. (Jim Cramer’s Charitable Trust is long MSFT, AMZN, GOOGL, META, ORCL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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Dado Ruvic | Reuters