Is the Gen AI bubble about to burst? You'd better hope not, as it appears to be one of the only major growth areas in the US tech economy, according to S&P Global.

There's something of a bifurcation in the US tech sector, the financial intelligence biz says in its latest report, with a small number of very large companies that are exposed to cloud and AI doing much better than the industry average.

On the flip side, companies operating in mature markets (PCs and smartphones) or sectors undergoing inventory corrections (industrial, automotive, and networking equipment) are underperforming the average.

But don't worry; S&P says the current environment for US tech is typical of midcycle conditions and not indicative of a recession. Unless that Gen AI bubble bursts and everyone stops stoking the furnace with investment cash, of course.

"Cloud giants are heavily investing in AI despite uncertain monetization timelines, with combined capital spending for Microsoft, Alphabet, and Meta up 60 percent year over year," S&P Global Ratings Technology Director Christian Frank said in a statement.

Growth trends for cloud service providers (CSPs) improved over the previous couple of quarters owing to "less defensive" enterprise IT budgets. CSPs are seeing the benefit of this, with on-premises to cloud migrations up, more new workloads, and AI workloads coming online.

Where's the return on my AI investment?

However, S&P believes the path to AI monetization and maturity will be longer than previously expected. The major players are making substantial capital expenditure investments, and S&P expects this to continue, with Microsoft indicated it is planning for higher capex during fiscal year 2025 compared with 2024, for example.

The report quotes Google's Sundar Pichai as saying that the risk of underinvesting is dramatically greater than the risk of overinvesting - words that might easily come back to bite him on the gluteus maximus.

As The Register reported this week, Google is keen for customers to get on board the AI train, even though in its own report, only 43 percent of respondents said Gen AI had had a meaningful impact on productivity.

S&P admits that AI adoption by enterprises remains modest, noting that companies are still sorting through the proliferation of models and figuring out use cases. "We think these factors point to a longer path to monetization and maturity than previously expected," the report says.

Nevertheless, the firm's forecast for IT spending remains at 8 percent for 2024, with that bifurcation between AI and everything else leading to customer spending on cloud services remaining robust while weakening in enterprise hardware and non-AI areas.

Assuming the bubble does not burst, S&P forecasts global AI spending to grow by more than 20 percent through 2028, when it is estimated to account for 14 percent of total global IT spending, up from 6 percent in 2023.

On a more upbeat note, S&P says it expects a stronger second half of this year with signs of gradual recovery across most subsectors, thanks to the release of pent-up demand held over from 2023 in some sectors. And US IT spending remains stronger than in Europe.

In other areas, the smartphone market is said to be rebounding, with global unit growth of over 6 percent, but here S&P was referring to IDC figures reported by The Reg last month that show the most growth is coming from Chinese brands like Xiaomi. (3)

In PCs, the market continues a "tepid recovery" with units growing 3 percent year over year, but S&P expects to see a stronger 2H 2024 from enterprise upgrades to get ahead of Windows 10 support going end of life and to refresh an aging installed base. It also expects AI PCs to boost sales - if vendors can agree on what that means - claiming these will have an outsized impact on revenue because of their higher prices.

That AI word crops up again in server and storage, where S&P looks forward to improved shipments due to pent-up demand requiring a refresh cycle and AI servers. It believes AI server shipments will double in 2024. However, the networking sector is weak because of "inventory digestion" and a shift in enterprise spending to refresh other IT priorities like compute. Reflecting this, Cisco is expected to chop more staff this week.

Another sign of the times is that S&P says it has placed Intel on an 'A-' issuer credit rating "with negative implications", following the chipmaker's poor performance in its recent earnings announcement.

Intel plans to lay off more than 15 percent of the workforce to cut operating expenses, slashed capex by more than 20 percent, and suspended its remaining dividend. S&P says bleakly "it is unclear to us if these steps will be sufficient to maintain competitiveness and enable healthy growth."

AI is also showing its hand in the semiconductor market. S&P says that for the quarter ended in June, global semiconductor industry revenue was up 18 percent year on year, but only 4 percent if memory is excluded. If AI chips are also excluded, the quarter was likely negative, it claims.

The financial watcher believes 2Q 2024 was likely when the market bottomed out, and the next quarter will see an improvement in most end markets, although it expects the recovery to be gradual through to the end of 2024.

AI chips (meaning GPUs) are leading the growth in the datacenter market, as has already been noted by other analysts, while general purpose silicon "squeezes out modest gains."

Memory makers had a good quarter, with DRAM revenue up 97 percent year on year and NAND up 87 percent, including high bandwidth memory (HBM) in DRAM and enterprise solid state drives in NAND, attributed to strong demand for AI applications.

S&P claims that Intel was flat sequentially during the quarter, while AMD was up 21 percent, mostly due to AI but also gaining some general purpose share. "Given Intel's execution issues, we expect AMD to pick up share over the next 12 months," the report states. ®

https://www.theregister.com//2024/08/14/ai_investment_growth/