Thursday, September 19, 2024

Rate cuts plus innovation equals ‘magic’ for tech: Analyst

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Goldman Sachs managing director Kash Rangan sits down with Brian Sozzi and Madison Mills at the Goldman Sachs 2024 Communacopia and Technology Conference to discuss the Tech sector’s outlook as the Federal Reserve kicks off its rate-easing cycle.

“With every economic cycle, as we come out of an economic cycle, coincidentally, there’s always a new tech cycle that also goes with it,” Rangan tells Yahoo Finance. He explains that after the 2008 recession, tech companies came out with cloud products, which eventually became “the catalyzing force for the tech industry.”

He notes that for real growth, there needs to be innovation alongside economic improvement: “It’s not as easy as saying lower rates are good. I mean, they’re kind of the first lift. It’s the primer. The next thing, it has to be followed by real innovation.”

At this moment for tech, he believes “this game is about capital.” Cloud, just like AI, was “capital-intensive,” Rangan explains, and if companies like Microsoft (MSFT) and Adobe (ADBE) hadn’t listened to investors, he argues that they wouldn’t have the massive cloud businesses they have today. He adds, “Now we’re augmenting human capital, I don’t know, $20, $30 trillion? That installed base of human capital is far more valuable. That’s cognition capital than compute capital. So this cycle, if done well, is going to be huge.”

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video Transcript

When I talked to Jan this morning, he made up a lot of good points and he said he sees a series of rate cuts.

So if we get a series of rate cuts, a lot of these tech stocks that have been selling off now are they back off to the races.

More multiple expansion earnings.

We accelerate.

And we’re looking at some of these stocks.

Maybe maybe they’re up 2030 40% from where they are now.

I wish it would make my job so simple.

In fact, I quit when I was interviewing ya on stage today that Oh, so your rates are gonna come down, so it means multiples are gonna go up and I’m gonna have to upgrade my price targets.

No, no, no, no, not that fast.

With every tech cycle, there is a I’m sorry with with every economic cycle as we come out of an economic cycle.

Coincidentally, there’s always a new tech cycle that also goes with it.

And if you’re on the right side of tech and if you got the goods the sales force into you know, Mark was in 2009, 2010 distinctly remember.

The economy is coming out of the correction.

Right and cloud was in its infancy and lifting out of the recession and cloud was in its infancy, and cloud became the catalysing force for the tech industry.

You have to have.

You have to have cloud.

Otherwise you’re going to be left behind right?

And so similarly, it’s not as easy as saying lower rates are good.

I mean, they are kind of the first lift.

It’s the primer.

And next thing it has to be followed by real innovation.

If your net expansion rates go from 170 to 190 they stall, it’s no good.

It needs to go up.

We need to get the industry back from 11% growth rate to 20 30%.

That new innovation needs to happen.

You need to be the first capitalist on gen.

Your products need to come out.

You need to be able to improve your retention.

Upsell.

When you compound that innovation with lower rates, magic happens.

Does that mean you think that Microsoft is the A I winner?

Because they sort of do have first mover advantage?

I think this game is about capital, unfortunately, or fortunately for the hyper scalar.

So you need to deploy.

Unlike prior cycles.

Uh, the cloud was capital intensive.

By the way, people forget that there was a lot of criticism of companies like Microsoft and Adobe.

What are you doing?

You’re taking your 80% gross margin business and making it 70% gross margin.

What the hell do you do?

Right?

And if they had not if they had listened to investors and they had not spent the capital that they spent, we would not be talking about an $80 billion cloud business, whatever it is.

So So these are visionary managements that, uh that, uh, decided to spend.

And this capital cycle is even more intensive of a capital cycle than the cloud was right back in the cloud.

Today, it’s a trillion dollars, give or take a little bit less than that.

We were substituting on Prem with cloud basically substituting.

Compute with computer.

That’s all we did.

Now we’re augmenting human capital, Human capital.

I don’t know.

2030 trillion that installed days of human capital is far more valuable.

That’s cognition capital than compute capital.

So this cycle.

If done well, it is going to be huge.

And if you are Satya Adela, if you’re one of these tech CEOs hyper, you’re like, OK, I was lucky to get the cloud cycle.

Right, Man, this cycle is not a trillion dollar cycle.

This is like multiples of trillions of dollars.

I hate to get on it if I don’t.

If I’m not the first mover, I’m crushed.

As you know, you don’t want to be even the third in the tech industry, it’s either one or a strong number two.

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