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We are here at the Goldman Sachs 2024 Communacopia and Technology Conference. I'm Madison Mills, here with Brian Sozzi, our executive editor. We are thrilled to be joined by Kash Rangan. He is the managing director over at Goldman Sachs. Kash, you've got quite the coverage list of software names, the hyperscalers we love to talk about. But I want to start on this tech sell-off that we are in the middle of right now. The market's recovering a little bit today, but what are you hearing from executives here at this conference? And how does that impact your bullishness on some of these AI names?

Yeah. So I'd like to always say the three things that are important for software companies at this point in time, rates, elections, generative AI. So, rates, we had Jan Hatzius, our chief economist, make his prediction that we're going to get a 25 basis point cut, maybe 50 basis point cut. But you cannot possibly underestimate the degree of confidence that tech executives would have because it means something to their end customers. The the signal that the Fed sends that the cost of capital for your business is projected to come down. So, Jan's now saying that over the next several quarters or so, the rates are going to come down to 325, 350 basis points. That's a very different regime. So, tech investments and tech spending overall where there is a cost of financing element that is adding to that sensitivity, we'll start to feel alleviated. So you're seeing CFOs at this conference say distinctly when asked the question, what do lower rates mean for your business? Oh, the worst thing you could hear was, it's definitely not a negative. But the best thing, it is going to be a tailwind for existing customers to expand their deployments. So it all starts to add up and compound, small little steps start to compound. Rate reductions give you a little bit of expansion in your current book of business. We call this NER, net expansion rates. It's been stable for the industry. It it came down significantly over the last three years since things peaked in 2021, right? We're starting to see some stability. And if what the CFOs are saying that rate cuts are going to be positive for expansion rates, that expansion rate starts to move up, which is it has never moved up in the last three years. All it's done is just keep going down. That's a positive, right? The other thing that's also important is post-elections, uh less uncertainty. It's not it's not important to nail what the new policies are going to be, but it's more important to have less uncertainty and more certainty about what those policies are. My belief is that once we get through November, we're going to have uh if it's not the outcome that you want as a business person, you're going to pull in your spending into Q4. If it is the outcome that you want, you're going to feel good and say, you know what? These capital projects that I've withheld with held will start to get improved. And then Gen AI, that more of a long-tail thing, I'm very bullish how it unfolds eventually in the long term. Uh but the proof points, if you're looking for proof points today, there there there's a scattering of proof points, but not enough to get conviction that this is going to be a thing in 25 or 26. So

When I talked to Jan this morning, he made a lot of good points and he said he sees a series of rate cuts. Yeah. So if we get a series of rate cuts, a lot of these tech stocks that have been selling off now, are they back off to the races? More multiple expansion, earnings reaccelerate, and we're looking at some of these stocks, maybe maybe they're up 20, 30, 40% from where they are now.

I wish. It would make my job so simple. In fact, I quipped when I was interviewing Jan on stage today that, oh, so rates are going to come down. So it means multiples are going to go up and I'm going to have to upgrade my price targets. No, no, no, no, not that fast. With every tech cycle, there is a, sorry, with every economic cycle, as we come out of an economic cycle, coincidentally, there's always a new tech cycle that also goes with it. And if you're on the right side of tech, and if you got the goods, the salesforce into, you know, Marc Benioff really was in 2009, 2010, distinctly remember, economy's coming out of the correction, right? And cloud was in its infancy. And, um, we're lifting out of that recession, and cloud was in its infancy, and cloud became the catalyzing force for the tech industry. You have to have, you have to have cloud, otherwise, you're going to be left behind, right? It's similarly, it's not as easy as saying lower rates are good. I mean, they're kind of the first lift. It's the primer. Next thing, it has to be followed by real innovation. If your net expansion rates go from 170 to 190 and they stall, it's no good. It needs to go up. We need to get the industry back from 11% growth rate to 20, 30%. For that, new innovation needs to happen. You need to be the first to capitalize on Gen AI. Your products need to come out. You need to be able to improve your retention, upsell. When you compound that innovation with lower rates, magic happens.

Does that mean you think that Microsoft is the AI winner because they sort of do have first mover advantage?

I think this game is about capital, unfortunately, or fortunately for the hyperscalers. So you need to deploy, unlike prior cycles, uh the cloud was capital intensive by the way. People forget that there was a lot of criticism of companies like Microsoft and Adobe. What are you doing? You're taking your 80% gross margin business and making it 70% gross margin. What the hell do you do, right? And if they had not, if they had listened to investors and they had not spent the capital that they spent, we would not be talking about an $80 billion cloud business, whatever it is. So, so these are visionary managements that that decided to spend. And this capital cycle is even more intensive of a capital cycle than the cloud was, right? Back then the cloud, today, it's trillion dollars, give or take, a little bit less than that. We were substituting on-prem with cloud. Basically, substituting compute with compute. That's all we did. Now we're augmenting human capital. Human capital, I don't know, 20, 30 trillion. That installed base of human capital is far more valuable. That's cognition capital than compute capital. So this cycle, if done well, is going to be huge. And if you're Satya Nadella, if you're one of these tech CEOs, hyperscaler CEOs, you're like, okay, I was lucky to get the cloud cycle right. Man, this cycle is not a trillion dollar cycle. This is like multiples of trillions of dollars. I need to get on it. If I don't, if I'm not the first mover, I'm crushed. As you know, you don't want to be even the third in the tech industry. So you're one or a strong number two.