Morgan Stanley's view on the US stock market in 2024 | Will the B-side of AI exceed expectations?

In 2023, generative AI will experience a major breakthrough and rapidly penetrate into the public's daily lives. However, compared to the enthusiastic reception in the consumer market, the adoption of AI in the B2B sector has been slow.

According to a report released by Morgan Stanley last week, although AI has received widespread attention in the industry, it has not yet had a "substantial impact" on spending. AI-related IT spending is still relatively low in 2023, but significant growth is expected in the coming years:

A survey of Chief Information Officers (CIOs) shows that investment priorities are influenced by artificial intelligence, but spending is not yet substantial. 95% of respondents stated that AI has little or no impact on their priorities, and 92% of respondents reported no spending or less than 5% of their public cloud budget.

Although there are uncertainties in the development of artificial intelligence, there is no doubt that businesses will increase their spending in this area. Morgan Stanley points out that AI will have an impact on the overall IT budget, with most of the spending being reflected in cloud services:

By 2024, the capital expenditure of the top ten cloud computing service providers will reach $200 billion, an increase of $50 billion from 2021, mainly due to increased investment in artificial intelligence.

56% of CIO respondents expect AI to have a 5% or more impact on cloud computing spending within three years (an average of about 7%, or $50 billion). There are indications that most of the growth in AI spending will be in cloud computing, with over 50% of CIOs expecting AI to be deployed in a combination of on-premises and cloud deployments.

Additionally, 18% of hardware experts expect an increase in spending on enterprise hardware in the next 12 months due to recent AI innovations, and 33% anticipate an increase in the next three years. This suggests that AI spending may be additional rather than cannibalizing traditional IT infrastructure spending.

We are most optimistic about the opportunities in AI cloud servers. It is predicted that the AI server market will grow from $55 billion in 2023 to $100 billion in 2025, with a compound annual growth rate of 35% from 2023 to 2025. Enterprise hardware spending will increase by $45 billion annually in the next two years.

It is worth mentioning that the slow adoption of AI in the B2B sector is due to the different cycles of consumer technology and enterprise software adoption. Consumer technology cycles can be very fast, as demonstrated by ChatGPT reaching one million users in just five days. On the other hand, the replacement of enterprise software tends to be more cautious due to higher aversion to "friction" in the enterprise, more integrated and proprietary workflows, and higher customer retention rates. Therefore, the replacement cycle for existing software is longer. As a result, the adoption rate is relatively slow.

Furthermore, where will the funds come from for companies to increase their spending on AI? According to Morgan Stanley, some of the funds will come from cost savings in labor. AI software vendors are expected to benefit from this process:

These expenditures come from cost savings in labor. By saving on labor, software vendors can obtain $150 billion in funds, but this can only support a 3% increase in overall IT budgets, accounting for about 15% of the software budget. Therefore, more budget is needed.

Based on the assessment of the average adoption rate of productivity gains from recently released products and pricing announcements (Microsoft GitHub Copilot, Microsoft Office 365 Copilot, and Zendesk Advanced AI), software vendors are expected to achieve a market penetration rate of approximately 20% for generative AI software within three years, driving nearly $150 billion in global AI software spending.

In addition, Morgan Stanley believes that AI spending will continue to grow, and the software and chip industries may be the biggest beneficiaries (the software and semiconductor industries have risen by 53% and 47% respectively this year). Early-stage corporate spending may flow into areas such as data center construction, CRM applications, and strategic consulting.