New IT spending survey bodes well for 7 tech stocks in A.I. to cloud to cybersecurity

Published Wed, Jul 12 20236:00 AM EDT

Analysts at Morgan Stanley published the results of their second-quarter CIO survey, providing valuable insight into information technology budget expectations. A number of big companies whose stocks we own in the Investing Club portfolio are dependent on how much businesses are willing to spend on IT. The major theme is artificial intelligence. The survey, which was conducted from May 4 to June 9, pointed to a "muted near-term outlook for IT spending and a more robust long-term picture." The number of CIOs, or chief information officers, who expect a downward revision to IT budgets in 2023 outpaced those expecting an upward revision by about three to one. However, more CIOs expect IT spending as a percentage of revenue to grow over the next three years compared to those expecting a decline. Artificial intelligence While the introduction of generative AI models such as ChatGPT from Microsoft -backed OpenAI and Bard from Google-parent Alphabet are expected to drive future IT spending, the survey results don't yet point to them being a "needle mover." (Microsoft and Alphabet are Club names). Only 4% see new projects starting due to AI. However, it's encouraging to hear that "56% of CIOs say recent innovations around large language models and associated generative AI technologies are having a direct impact on 2023 IT investment priorities," according to the survey. This divergence between the majority of CIOs seeing an impact and the much smaller number seeing "significant new projects" ahead signals to us that AI is still largely in the experimentation phase. Against that backdrop, we expect IT spending to increase as the economic outlook becomes less uncertain and companies begin to better understand the various use cases for generative AI and large language models (LLMs). Cloud and cybersecurity Digging a bit deeper, the survey reveals that cloud computing and security software remain the top two priorities for CIOs followed by artificial intelligence/machine learning. Digital transformation and customer relationship management solutions came in at four and five, respectively. That's music to our ears given our tech exposure. Amazon Web Services and Microsoft's Azure are the top two cloud offerings in the world with fellow Club holding Alphabet rounding out the top three. The analysts at Morgan Stanley note that about 29% of workloads are currently in the cloud and expect this number to rise to about 45% by 2025. That's plenty of room left to grow. The analysts singled out Microsoft as the most exposed to the two major themes of the survey — generative AI via ChatGPT and cloud consumption via Azure. As a result, Microsoft has been designated what Morgan Stanley calls its "Top Pick in Large Cap Software." The analysts called out Amazon (AMZN) as the next major beneficiary, saying that Dell and Hewlett Packard Enterprise are the two most likely market share donors in the near term and over the next three years. At the same time, Club name Palo Alto Networks (PANW) is our pick for cybersecurity and is proving a winner of IT budget rationalization efforts as management teams look to consolidate their security strategy to those platform names that can provide an all-encompassing solution. That's PANW. In line with our view, the analysts highlighted Palo Alto as "a leading beneficiary of the trend to consolidate security spending as budgets get tighter." Longer term, the analysts note that as more workloads shift to the cloud, CIOs surveyed noted that "Palo Alto Networks screens as one of the top vendors to gain an incremental share of IT budget in 2023 and in the next three years." Enterprise software As for customer relationship management, or CRM, solutions, our play is none other than Salesforce , which made its stock ticker CRM. The fact that customer relationship management applications made it into the top five in the Morgan Stanley survey bodes well for Salesforce, indicating positive demand. That's hugely important since Salesforce announced a series of price hikes Tuesday that Wall Street rewarded with a more than 3% boost in the stock. By the way, Salesforce's 65% year-to-date gain makes it our 5th best-performing stock in the Club portfolio. Salesforce said that it will raise list prices by an average of 9% on certain offerings starting in August. "Salesforce's last list price increase was seven years ago, and since then the company has delivered 22 new releases, thousands of new features—including recent generative AI innovations—and invested more than $20 billion in research and development," the company also said. Cloud and AI enablers All of this also bodes well for the names that make cloud computing, generative AI, and LLMs possible. Yes, that would be Club chipmakers Nvidia (NVDA) and to a lesser extent Advanced Micro Devices (AMD), two names getting price target increases from KeyBanc. The analysts took PTs on NVDA to $550 per share from $500 and on AMD to $160 from $150. Both price target hikes were on the back of an increase in forward estimates. "Across the board, almost all supply chain partners that [they] met with had called out extremely robust demand for AI servers," according to the KeyBanc note. Importantly, the demand is not only coming from cloud service providers (CSPs) but also from enterprise players and AI startups. That said, the analysts do expect AMD's MI300 AI chip to be delayed from fourth-quarter 2023 to first-quarter 2024. Such a delay could play into Nvidia's hands in the near term by freeing up some production capacity to help meet demand. Bottom line The CIO survey from Morgan Stanley speaks to an uncertain macroeconomic backdrop resulting in temporary pressure on spending for a secular shift toward cloud computing, digitization, and associated technologies. Given the monster run year-to-date in technology, we think this is an important dynamic for investors to understand and be mindful of as many of the 2023 winners start to consolidate those gains. With earnings season about to ramp up, there will be a lot of attention paid to forward guidance and what management teams are seeing out to 2024. As a reminder, now that we're in the back half of the year, we are starting to look to 2024 estimates as the basis for valuations. (Jim Cramer's Charitable Trust is long MSFT, GOOGL, AMZN, PANW, CRM, NVDA, AMD. 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. 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OpenAI with Microsoft - Bing seen on mobile, seen in this photo illustration.

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