Is Gen AI going to eat the world?

Salesforce reported earnings this week and missed on both the top and bottom line. The stock was down as much as 21%, the worst single day price action in 20 years. Revenues still grew at almost 11% in the quarter but the guidance was for 7% for the current quarter. Growth is clearly slowing and this is consistent with results from other enterprise software businesses.

• A few things going on here, some cyclical and we think some is secular.
• As companies are cutting headcount they need less software licenses
• Companies are also investing a lot of capex in to their Gen AI strategies and some of this could be at the cost of their software budget
• The secular trend we think may be more important
• In 2011 Marc Andreessen said “Software is eating the world”
• This was very prescient and has been the dominant trend for over a decade
• Software is a good solution for businesses to help their employees perform certain tasks easier and faster
• Rather than building their own tech, most companies will use software that they buy on a license basis from companies like Salesforce
• However, Gen AI has the ability to replicate or replace some of this software very easily
• Klarna, the large BNPL company from Sweden, revealed this week that they were able to cut their marketing budget by $10mm annually using Gen AI
• As this trend continues to take hold across other industries, this may completely change the trend in the software industry

Housing market refresher/update

This week we got some data that shows the housing market may be showing signs of cooling.  Pending home sales fell 7.7% in April from the prior month, which is usually a leading indicator of existing home sales. Additionally, Redfin reported that the percentage of homes with price cuts rose to 6.4% last week, the highest by a margin in the last few years. This is as we go into the strongest seasonal period for home sales, and historic levels of new construction coming online.

• Real estate has sensitivity to interest rates
• As we have gone from very low interest rates for over a decade, to relatively high interest rates over the last few years, you would have thought that housing prices would come down
• Instead, house prices have remained at very high levels
• This has brought housing affordability to its lowest level in 20 years
• This dynamic is an unintended consequence of the very rapid increase in rates
• When people are looking to buy a home, they don’t buy based on the value of the home, but based on the monthly payment they can afford
• As mortgage rates have gone from under 3% during the pandemic to over 7% today; the interest portion of that monthly payment has gone up dramatically
• Combined with higher values, this has put homeownership out of reach for millions of people
• In order for more people to be able to afford to buy a home 2 things need to happen; the price of the home needs to come down and/or interest rates need to come down
• Neither has happened yet
• Rates are partially controlled by the Fed and the Fed has been squarely in the higher for longer regime
• The value of homes is susceptible to supply and demand dynamics
• The less supply there is the more pressure higher on prices
• As people have been waiting to sell their homes for rates to come down, the supply of homes for sale has decreased to 4 months, a very low level relative to history
• As people accept that rates may remain higher for longer, we may be at a turning point for the values of existing homes
• Given their home represents the bulk of many people's wealth, this will have knock-on effects on the economy