Wall Street is challenged to navigate the nuances of AI investment strategies.
Wall Street’s assessment of a company’s long-term strategy is often clouded by its focus on its latest quarter’s performance.
Over the years, I’ve fielded calls from dozens of financial analysts who view me as a technology researcher looking at the long-term potential of various technology companies. However, even though these calls ask for input and commentary on future growth, the conversation always turns to my thoughts on the current quarter’s performance.
This kind of quarterly pressure keeps the CEOs and CFOs of public technology companies awake at night and drives many of the short-term investment and performance strategies. However, all technology leaders must take a broader vision of the company and bet on investing in its future, not just in the next quarter.
A good example of quarterly performance pressure affecting a company is Dell. Since Dell went public on March 3, 1984, there has been pressure to perform every quarter to make Wall Street and investors happy. At the same time, Dell needed to plan and invest in its future.
At some point, meeting Wall Street’s quarterly demands tests the patience of many tech CEOs, especially if the long-term vision calls for a major change in direction that would require major investment.
In the case of Dell, Michael Dell, the founder and CEO, saw the limitations of being a PC-only business and planned to lead Dell into becoming a full-service computer company that included advanced servers and in-house development of the software. Mr. Dell even envisioned buying businesses like EMC and VM Ware to transform the company. However, this would require a significant investment. Since the plan to make Dell what it is today was a secret and would be questioned by Wall Street if it became known, Michael Dell did the unthinkable.
In 2013, Michael Dell partnered with private equity firm Silver Lake Partners to take the company private. Wall Street thought Mr. Dell was crazy, as did many of his stock investors. In short, this move not only saved Dell, which was struggling at the time, but helped make Dell the powerful IT company it is today.
Forbes called it the “Deal of the Century” in August 2021 and said: “The results have been extraordinary. Automobiles, telecommunications, power grids, hospitals and logistics networks have all become digital businesses, producing an ever-changing array of data. growth that needs to be managed and maintained Dell is now leading the world’s largest infrastructure provider for this activity.”
In the age of AI, many tech companies face serious challenges, given the need to make significant long-term investments in AI while simultaneously trying to deliver quarterly results that make investors happy.
This creates a conundrum for Wall Street and all public companies that must add AI to survive.
A new question I’m getting from financial analysts suggests they’re thinking seriously about what it would take in terms of a public company’s investments to be a leader in AI. While they will continue to look for strong quarterly earnings, analysts seem to understand that large investments, acquisitions or new AI infrastructure costs should be factored into their buy or sell judgments.
In a sense, AI has reset the entire investment market on Wall Street. AI at all levels must become a central theme for every company, public or private, to improve its businesses and stay competitive. This means that large investments that may not pay off immediately must be factored into any short-term view of a business and its future.
Disclosure: Dell subscribes to Creative Strategies research reports along with many other high-tech companies worldwide.