How AI will drive the next tech spending cycle

Big Tech has been all about AI in recent months. But in order to bring their AI advancements to the public, they have to spend money to build them first. Spear Invest Founder and CIO Ivana Delevska tells Yahoo Finance Live that "the biggest theme that came out of this earnings season from the big mega-caps that reported is that we're going to see a re-acceleration in CapEx" with the spending going to "investments to enable AI."

Video transcript

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JULIE HYMAN: After consumer technology drove the previous tech cycle, the Spear Alpha ETFs tracking the wave of growth that's expected to come from business-to-business tech spending. Spear Alpha is an ETF listed on the NASDAQ. The company behind it Spear Invest is an asset manager specializing in positioning investors in underappreciated opportunities in industrial technology sectors.

This could be anything from enterprise digitalization, automation, space exploration. For more, we're joined by Ivana Delevska, Spear Invest founder and chief investment officer. So Ivana, we keep talking all about AI and the opportunities that we might see. We're looking ahead this week to earnings from the likes of Apple and Amazon. When it comes to industrial tech specifically, what do people need to know?

IVANA DELEVSKA: Well, the biggest theme that came out of this earnings season from the big mega-caps that are reported is that we're going to see a re-acceleration in CapEx. And this was echoed by Microsoft, Google, Meta, everywhere you look, to 2H, second half, '23 spending is supposed to be higher than first half, and similarly '24 is supposed to be a stronger year than 2023 in terms of CapEx spend. And all of these CapEx dollars are going into investments to enable AI.

So what we heard this time was even broader than GPU purchases, companies are spending on CPUs, broader networking. So we expect that this will drive the next tech cycle going forward.

BRAD SMITH: By how much are we expecting CapEx to increase?

IVANA DELEVSKA: Well, Microsoft is one example where the company is expected to spend $40 billion in the next year, and that was 25% above consensus. So $40 billion just if you step back is a huge number because these companies are not really that large like Nvidia, AMD, and Marvell are our top picks in the Semi space. They're going to see a pretty significant boost to demand.

JULIE HYMAN: To your point, most of the focus thus far has been on the Semis, where else do investors need to be looking?

IVANA DELEVSKA: So the next layer we believe that we'll see a significant boost in spending is around data architecture, data infrastructure, cloud spending. So basically as semiconductors sell chips to the cloud vendors, the cloud vendors in turn will sell those as services to companies.

And then in that ecosystem there is a number of companies that provide data streaming, data warehousing, cyber security type services that we think will really benefit here because they don't really need to make a ton of incremental investments. They're going to be using their existing products to enable this new wave of AI spending.

BRAD SMITH: And so for the matriculation or the timeline as to when we can kind of hold these companies up to a report card to say whether or not their CapEx and the spending on generative AI or the infusion of more AI solutions into their businesses has been successful, what does that timeline look like from your estimation?

IVANA DELEVSKA: Well, in terms of the spending, companies are going to see that provide services and hardware are going to see it in the next six months to two years, right. So that's going to be pretty much early in the cycle. Then the next wave is going to be whether these products are actually successful. So it's going to be whether products like Office 365 Copilot is actually generating returns for Microsoft.

And we're about two to three years out of that to see whether the AI products that are introduced are working in the market. But from early signs that we can see in terms of surveys, there was Microsoft Copilot, which was one of the early solutions for coders that was introduced earlier this year, there is clearly significant demand and there is clearly significant productivity improvement. It's just a matter of rolling this out to a wider audience.

JULIE HYMAN: And just quickly, Ivana, it sounds like you don't share some of the concerns out there about a bubble forming in some of these names.

IVANA DELEVSKA: Well, that's right. And the reason why we don't believe there is a bubble forming is because we are seeing a very typical pattern that you would see in any tech cycle previously. So first early cycle, Semis recover, right? And then you see broader enterprise spend recover. And we're just seeing that this quarter. So the earnings from the mega-caps told us that enterprise spend will be on the rise going forward.