In a recent survey conducted by Piper Sandler, it has been revealed that corporations are reallocating their budgets towards experimental artificial intelligence (AI) projects. While this presents a significant opportunity for Microsoft, it may pose some challenges for tech hardware vendors.
According to the survey, the overall budget outlook for this year shows a decline of 1.3 percentage points compared to six months ago, with a 3.6% growth rate year over year. This indicates that IT budgets are likely to moderate in 2023.
Rise of AI Applications
One notable trend uncovered by the survey is that companies are prioritizing new AI applications above all else. Generative AI, in particular, has risen nine spots in priority and is now recognized as the top emerging technology trend for the next three years. The report also highlights that a significant majority of Chief Information Officers (CIOs) are either testing or implementing AI projects.
Microsoft stands to be the major beneficiary of this shift towards AI in enterprise spending. The company can leverage this opportunity in two primary ways: through the increased demand for its Azure cloud-computing service and the introduction of new paid software features.
Demand for Azure
Based on the survey results, CIOs have expressed their intention to utilize more of Microsoft’s cloud services for AI purposes. This indicates a growing demand for Azure, positioning Microsoft as a leading provider in this space.
AI-Enabled Microsoft 365 Copilot
Adding to their advantage, Microsoft recently announced its forthcoming AI-enabled software called Microsoft 365 Copilot. The pricing of this service was set higher than initially estimated, at $30 per user per month. This surprise decision generated excitement among investors and resulted in a sharp increase in Microsoft’s market value. In fact, its shares surged by 4% to reach a record high in the wake of this announcement.
As corporations increasingly prioritize AI projects, Microsoft emerges as a clear winner in this evolving landscape. With their Azure cloud-computing service and the introduction of AI-enabled software subscriptions, Microsoft is well-positioned to capitalize on this shift in budget priorities.
AI’s Impact on Hardware Suppliers
As Microsoft enjoys the excitement surrounding AI, other vendors are facing challenges. After analyzing responses from CIOs, experts predict that hardware suppliers, such as computer server makers, will likely face budget pressures later this year.
Taiwan Semiconductor Manufacturing (TSM) also provides evidence of a budget-shift driven by AI. As a dominant player in the market for high-end chips, TSMC often has an early read on market changes. The chip giant holds approximately 60% of the third-party chip manufacturing business, with Samsung Electronics following at 12%.
TSMC’s management recently reported a softening of semiconductor demand. They noted that the macroeconomic environment, expectations for China’s recovery, and end-market demand all appeared weaker than expected just three months ago. With declining smartphone and PC categories accounting for a majority of TSMC’s business, the company significantly lowered its financial guidance for the year, projecting a year-over-year decline of 10% in revenue.
Aligning with the CIO survey, TSMC observed a significant rise in interest related to AI. However, this increase was not enough to offset the overall drop in semiconductor demand.
During the second-quarter earnings call, TSMC Chairman Mark Liu addressed concerns that the surge in AI orders might be taking sales away from traditional server chips. He acknowledged that in the short term, when the capex budgets of cloud service providers are fixed, AI could cannibalize data-center processors.
With CIOs and the world’s largest chip foundry echoing similar sentiments, investors need to be aware of the risks that AI may bring to computer server and server processor manufacturers.