There's a popular story in the investment community that during the gold rush, the people who really made money weren't the miners, but the entrepreneurs who sold them the picks and shovels they needed to mine. Investors who tell this story often point to California's first billionaire, a businessman and newspaper publisher named Samuel Brannan. He made most of his fortune selling equipment and food to gold miners at high prices during the 1840s and 1850s. Some people might bring up Levi Strauss. Levi Strauss was a German-born businessman who imported luxury goods (including, of course, blue jeans) to San Francisco. Although Strauss did not spend a minute mining, he was certainly rewarded with the profits that accompanied the gold fever of his time.
While this “pick and shovel” narrative undoubtedly has merit and continues to inform investor decision-making in the modern technology-focused “gold rush,” it is only part of the story. Not too much. Although the first to profit from the gold rush were a few lucky miners and those who sold them food and equipment, the effects of the boom were far-reaching and the profits were distributed around the world. It was done. The Gold Rush helped finance the first transcontinental railroad, ushered in a “green gold” agricultural boom in California, and spawned accelerated industrialization, increased international trade, and innovations in transportation and communications.
Importantly, the true characteristic of revolutionary discoveries and innovations – once-in-a-lifetime opportunities for investors and the global economy – is often their long-term network effects. Positive second- and third-order effects come after the pick and shovel seller has already made a profit. This was also true during the canal boom of the 18th century and the dot-com era of the late 90s and early 2000s.
Investors have long sought evidence of these network effects, trying to separate hype from reality, as the artificial intelligence boom of the past decade has been compared to a gold rush. Many respectable studies and predictions predict that AI can increase productivity, usher in an era of innovation, and even increase GDP in the long run. But so far, only a small number of companies have actually benefited from the AI boom.
Tech giants like Nvidia and ASML, which sell the pickaxes and shovels of the AI revolution – the underlying technologies that enable AI to operate – continue to outperform and look like they're on track to continue doing well. . But outside of these giants, the evidence on the ground that AI is believed to improve productivity and boost the economy has been more nuanced.
However, SAP SE may be an example of the growing prominence of AI. The Walldorf, Germany-based technology giant, which has approximately 108,000 employees and a market capitalization of $225 billion, is the world's leading provider of enterprise resource planning (ERP) software and is essentially a large enterprise company. Provides a back office engine.
SAP's ERP software is increasingly moving to the cloud, helping with supply chain management, accounting, human resources, expense, and many other business operations. And, as Luann Cunniff LP, investment advisor and distributor for Sequoia Funds, a major investor in SAP, explained in his January annual letter to shareholders, “What happens in the physical world? For multinational companies that make and run things, SAP is the only game in town.
Although SAP is not an AI company and does not sell the picks and shovels that enable AI, it has indirectly and directly benefited from the rise of technology.In an interview with luckSAP CFO Dominique Assam said the AI boom is helping drive growth for his company, and he is focused on leveraging technology to improve productivity and reduce costs within the company.
When it comes to the hype and real-life issues surrounding AI, Assam is also bullish. “This isn't some kind of joke or hype, it's actually one of the biggest, if not the biggest, disruptions in the technology industry,” he said. luck.
SAP case study: The incremental benefits and potential pitfalls of AI
Secure your move to the cloud
The first network advantage seen at SAP that could be evidence of the staying power of the AI boom is the company's move of ERP services to the cloud. Asam says AI has helped many of his SAP ERP customers move from on-premises computing to cloud-based computing, and this means a big demand for his business in the company's cloud. said.
“AI is really transforming the last bit of skepticism we had on our journey so far.[premises] “It's cloudy,” he said. luck. “They understand that we need to move to the cloud, and they know that the on-premises model doesn't work given the speed of innovation. It's too slow and they don't have the most productive systems available. lose.”
Rapid advancements in AI systems for ERP mean companies need to be able to continually update their internal software, which would be costly to do in the field, Assam said.In an interview with luck, UBS analyst Michael Briest supported the idea that AI has become a “catalyst for modernization” of many companies' ERP software, benefiting SAP's cloud ERP business. Additionally, SAP's April 22 earnings report showed that its first quarter cloud revenue increased by 24% and its current cloud backlog (CCB) increased by a record 27%. it was done. CCB's growth numbers represent next year's cloud revenue for which customers are already signed up and are seen by analysts as a measure of potential demand.
New revenue opportunities
SAP is not a pure AI business, but like many technology companies these days, it is adding AI services to shore up its bottom line and prevent customers from jumping to the competition. CEO Christian Klein announced in January that SAP will invest $1.1 billion in its business AI division as part of a restructuring to offer more AI solutions to its customers.
The company currently offers a variety of AI products that can help with everything from task automation to sales performance tracking to customer insights and more. According to Asam, his AI products from SAP will also help improve communication in various business departments such as accounting and human resources and eliminate errors in operations such as recruitment, payroll, and employee termination. . “For example, if an employee leaves a company, we need to ensure that all access to the financial system is automatically removed. Otherwise, controls will fail and auditors will come and say, “That guy.'' “They could have manipulated the financial system.'' He explained, arguing that AI can help prevent these problems. SAP also offers an “AI copilot” called Joule that helps classify and explain data across different applications.
Asam said that SAP customers (which, for reference, generate 87% of global commerce) require vast amounts of data to properly train their AI models, and only those who can provide it He claimed that only a few major companies did. However, SAP has agreed with the consent of a “majority” of its customers to use their data to train AI models, giving him a huge opportunity to provide AI services within the software. says his CFO.
Still, SAP has not yet categorized AI revenue into its own category, and current AI products may not contribute dramatically to sales in the short term. UBS's Bryst argued that the business AI sector is a “real opportunity” but will likely only see “incremental” revenue growth in the short term.
“My view today is that this is more about driving the move to the cloud. And of course, it also helps customers make modernization decisions. But it's a separate revenue line. Let's see. I think we need more evidence.”
But in the long term, Asam is bullish on the potential for AI to boost SAP. “We are developing these [AI] Go through the process as you talk. Currently, there are approximately 30 use cases, with another 100 expected to be developed for general market deployment by the end of this year. And we will continue to strengthen it over time,” he said. “So it's going to take some time for it to really take effect. But when it does morph, it could be very large.”
Increase productivity and increase profits
SAP has been bringing AI internally to save costs and improve employee productivity, and its efforts intensified after the restructuring announcement. Asam said the ultimate goal is to leverage AI to “decouple cost growth from revenue growth” in the coming years and increase productivity without significantly increasing headcount. Ta. “Frankly, we're replacing human processing power with machine processing power in some areas, and it's actually more scalable if we don't have a huge increase in inflation every year.” he said. luck.
Consider the example of the travel and expense management service SAP Concur. SAP is implementing an AI system that responds to expense requests. “That engine is essentially replicating or replacing work that was previously done. [by humans]There, some people's claims for travel and expenses are checked against regulations,” Assam explained.
Employees currently represent 69% of SAP's cost base, so reducing associated costs through AI could be beneficial. SAP CEO Christian Klein also highlighted multiple opportunities to leverage AI to save the company “in the triple-digit millions” during the company's quarterly earnings call.
UBS's Briest said AI's ability to reduce labor costs could ultimately be important for the software industry as a whole. “If you look at the software industry, half of our revenue goes out in payroll every night. This is a high percentage of revenue compared to capital-intensive industries. And we have a lot of talented people in sales, development, finance, and , accounting, these roles are going to be transformed,” he said.
Bryst argued that for SAP, some of the labor cost savings “will be reflected in the bottom line because we have a very sticky product.” This means that customers are less likely to migrate to a competitor because of the associated costs.
AI is about to have a real impact on the bottom line.
SAP's recent performance and future plans prove that AI has the ability to increase revenue, reduce costs, and improve productivity for businesses, but the true tipping point for this technology is still a long way off. There may be. Regarding SAP, UBS's Bryst warned that as AI revenues increase, “competitors will not sit still.” “There's a wave of innovation coming, and startups will be attracted to your high profitability,” he says. “A lot of that will be competed over time.”
But while this may not be good news for SAP, “it's probably good for the global economy,” Bryst said. After all, increased competition typically leads to innovation, lower costs, and increased productivity.
And while there is already evidence of SAP's positive impact on businesses, both direct and indirect, even Asam said: luck It will take more time for AI to grow its returns, as many serious investors expect. Even if AI results in hundreds of millions of dollars in cost savings and revenue increases, that's only a small change in SAP's bottom line, given the company's size.
As with many revolutions, he expects the impact of AI will not be felt as dramatically for a while, but then it will hit all at once. “In fact, things are changing into something much bigger than what people previously thought,” he says.
Asam compared the rise of AI to the dot-com bubble. In this bubble, investors' enthusiasm for the Internet drove some unprofitable tech stocks to insane heights before crashing, but ultimately the Internet delivered. “Today, that ecosystem is worth many times more than what people thought it was worth at the time. So I think, [AI] We will continue to follow a similar pattern,” Asam said. “This is why we at SAP are betting so hard on it.”
