Catalyst Watch
The Enterprise Strikes Back
Welcome to Catalyst Watch at The Transcript, a report that highlights investment themes from this week’s newsletter. This week’s edition is available for all subscribers.
1. The Economy Remains Resilient
If one word has come to define the economy of the 2020s it would have to be “resilient.” That word has appeared so many times in The Transcript that it sometimes feels like it has lost any meaning. To that end, we appreciated seeing Wells Fargo’s CFO at least try to find a new way to describe our resilient economy:
“People probably are maybe over using this word resilient, but it’s been very stable, very resilient, very good activity levels across really all of the businesses, which is really good to see.” - Wells Fargo (WFC -1.68%↓) CFO Michael Santomassimo
Still, there may not be a better way to describe what we’ve experienced than resilience. Blackstone’s COO gave a succinct review of what’s happened so far in the decade and used it as a decent argument as to why the outlook is for more of the same:
“The economy has been much more resilient than people expected. And this really goes back over time. If you went back to 2020, we obviously had COVID. We subsequently, the following year had the Russia-Ukraine invasion. We had the Silicon Valley Bank shock, which was more relevant to the folks in this room than the broader economy. We had Liberation Day last year. This year, the Iran war. And each time the global economy, particularly the U.S. economy, has powered through and the year ended more in a better spot than people expected. And I think the same thing will happen here. I think there’ll be some sort of resolution and the underlying strength of the economy will stick.” - Blackstone (BX -1.15%↓) COO Jonathan Gray
The economy feels so resilient that it almost begs the question as to whether the business cycle is still in existence. Of course, that question itself is usually an indication that the business cycle is not dead, but maybe it’s different this time.
Historically business cycles have come on the heels of overly exuberant capital markets. Capital markets are wide open today, but it’s not clear whether we are in a period of excess bullishness. Are we euphoric or just really excited? Brian Moynihan weighed in on this last week: “I don’t want to say euphoria yet, but there’s a lot of excitement about technology.”
2. The Enterprise Strikes Back at AI Costs
For the last few weeks we’ve been tracking how enterprises are spending huge amounts of money on AI. Last week that narrative seemed to start to shift back towards questions about whether there is ROI to justify the expense. Cisco President Jeetu Patel captured both the narrative shift and the risks:
“And now what’s happening is the cost of tokens are far higher than the actual value that these tokens are generating at scale. And so what ends up happening, and the big risk in the market is, if you don’t create an equilibrium there, then people just pull back on using tokens, and that’s actually not good for anyone.” - Cisco (CSCO -2.30%↓) President Jeetu Patel
Last week we published several quotes from businesses in different industries who echoed the sentiment of this quote and talked about ways in which they are working to limit spending on AI services. This includes paring back on deployment or utilizing non-frontier models for use cases where leading edge logic is not required.
The AI labs have been the biggest beneficiaries of increasing enterprise spend, and even though they aren’t public companies yet, public markets are certainly taking a queue from Anthropic and OpenAI. Enterprise spend is the primary reason why Anthropic’s valuation has now eclipsed OpenAI’s. If there is a pullback in spending growth then it could impact capital markets more broadly.
Before getting too far ahead of ourselves though, the ROI narrative is one that has been in vogue before. It’s most likely that enterprises will use more AI even as token prices fall, leading to value creation for all parties.
3. Congrats to SpaceX
We certainly don’t need to be the 10,000th publication to comment on the SpaceX IPO, but it was the dominant news story last week in capital markets. Rather than giving an opinion on the prospects for the stock and the company, we’ll just share the sentiment of congratulations to those involved. No matter what you think of Elon Musk, you have to give him credit for pulling off something extraordinary. Last week gave him an opportunity to reflect on the journey so far:
“If people had told me this was gonna happen, I was like… ‘man, you must be smoking some really good crack’. I think this company’s gonna fail. I mean, I gave SpaceX less than a 10% chance of succeeding at all, to be clear. In fact, I told people we’re probably going to fail, but you know, we should try it — because if there aren’t any new companies that enter space, then we will never become a truly spacefaring civilization.” - SpaceX (SPCX 18.15%↑) CEO Elon Musk