Wall Street is challenged to navigate the nuances of AI investment strategies.
Wall Street’s evaluation of a company’s long-term strategy is often overshadowed by its focus on its performance in the most recent quarter.
Over the years, I have fielded calls from dozens of financial analysts who view me as a tech researcher who examines various tech companies’ long-term potential. However, even though these calls want data and commentary on future growth, the conversation always moves to my thoughts about a current quarter’s performance.
This type of quarterly pressure keeps public tech companies’ CEOs and CFOs up at night and drives many of the short-term investment and performance strategies. Yet, all tech leaders must have a longer-range vision for the company and bet on investing in its future, not just the next quarter.
One good example of the pressure of quarterly performance that impacts a company is Dell. Since Dell went public on March 3, 1984, it was pressured to perform quarterly to make Wall Street and investors happy. At the same time, Dell needed to plan and invest in its future.
At some point, meeting Wall Street’s quarterly demands tests many tech CEOs’ patience, especially if the long-term vision demands a major change in direction that would require huge investments.
In Dell’s case, Michael Dell, founder and CEO, saw the limitations of being a PC-only business and plotted to move Dell towards becoming a full-service computing company that included advanced servers and internal software development. Mr. Dell even envisioned acquiring businesses like EMC and VM Ware to transform the company. However, that would take a considerable investment. Since the plan to make Dell what it is today was a secret and would be highly questioned by Wall Street if it became known, Michael Dell did the unthinkable.
In 2013, Michael Dell partnered with private equity firm Silver Lake Partners to take the company private. Wall Street thought Mr. Dell was crazy, as did many of his stock investors. Long story short, this move not only saved Dell, who was struggling at the time, but helped make Dell the powerful computing company it is today.
Forbes called it the “Deal of the Century” in August 2021 and said, “The results have been remarkable. Automobiles, telecommunications, energy grids, hospitals and logistics networks have all become digital businesses, producing ever-increasing reams of data that need to be managed and stored. Dell now sits at the helm of the world’s largest infrastructure provider for this activity.”
In the age of AI, many tech companies face severe challenges, given a need to make substantial long-term investments in AI while simultaneously trying to deliver quarterly results that make investors happy.
This provides a conundrum for Wall Street and all the public companies that must add AI to survive.
A new question I am getting from financial analysts suggests they are seriously considering what it would take in terms of a public company’s investments to be leaders in AI. While they will still push for strong quarterly earnings, analysts seem to realize that large investments, acquisitions, or new AI infrastructure costs must be factored into their buy or sell judgments.
In a sense, AI has reset the entire Wall Street investment market. AI at all levels must become a central theme for any company, public or private, to enhance its businesses and stay competitive. That means top-heavy investments that may not pay off immediately, need to be factored into any short-term view of a business and its future.
Disclosure: Dell subscribes to Creative Strategies research reports along with many other high tech companies around the world.
