The Year Of The AI Agents

Where to invest for retail investors?

Who of us hasn’t used an AI co-pilot by now? However, co-pilots need user prompts to generate code, draft e-mails, condense large text blocks, etc. We’re now stepping into an agentic era. These agents take humans out of the loop, performing tasks autonomously set by user-defined goals. AI agents can take actions based on real-time data and evolving contexts. Thus, they can independently plan, execute, and adapt to achieve user-defined goals.

Hitherto, AI has been all about “picks and shovel” companies, chip makers, and hyperscalers. AI agents are making software companies hot again. It is time to look into this burgeoning investing theme from a mental helicopter. This is a short presentation of the market leaders in the area, let’s see what kind of agents they are developing and how they plan to capitalize on them.

The investing landscape

Not surprisingly, all hyperscalers focus on developing agents alone or through subsidiaries and partnerships. Nvidia, for example, has developed NeMo as a tool-kit developers can use to build and deploy agentic models. Leaving the hyperscalers out of the picture, we also have lower-echelon players worth studying in more detail. Of course, we can’t delve into all of them here, but the following three companies are leading the development and implementation of AI agents in their respective industries.

Salesforce (CRM)

CRM’s CEO Mark Benioff has embraced agents wholeheartedly and has effectively communicated his company’s transformation into an AI-as-a-service (AIaaS) enterprise. CRM is up 28% this fall, indicating strong investor confidence in the agent theme.

Benioff predicts AI agents will solve complex, multi-agent challenges across enterprises, such as simulating product launches and marketing campaigns. In the launch of Agentforce, several CRM divisions touted their AI capabilities in a veritable tour de force. Together these divisions suggest that agents will revolutionize everything from customer service and marketing to analytical insights and sales. We are, for example, talking about a more personalized customer service where AI agents seamlessly analyze customer data and past interactions to provide tailored, context-aware responses and recommendations, creating more personalized experiences.

Obviously, CRM believes in AI agents, but this also gives it a lot to prove. Investors need confirmation that all these great words lead to higher revenues. CRM’s revenue growth has stair-stepped down in the last few quarters. Next week, CRM has to show investors that its Q3 results are holding up and that it can give positive guidance. Investors aren’t known for having a lot of patience, and investors want indications of higher growth again before putting more money to work. The upcoming Q3 presentation could, therefore, move the stock substantially.

ServiceNow (NOW)

NOW’s performance is very similar to CRM’s, up over 25 % in the last three months. This performance may be related to NOW’s strong revenue growth. Nevertheless, NOW’s Platform Xanadu release in September may have strengthened investor's confidence even more.

NOW's mission is to enable enterprises to connect workflows across siloed systems. Through its cloud computing platform, NOW aims to assist organizations in managing their digital workflows by providing a streamlined, user-friendly framework that simplifies work processes, accelerates productivity, and fosters greater efficiency.

The Xanadu platform can help NOW’s customers automate their workflow even more. Xanadu contains features with familiar co-pilot capabilities, including 350 out-of-the-box generative AI capabilities like data visualization and chat reply generation. However, it also contains AI agents that freely perform tasks within user-defined parameters. Furthermore, it allows organizations to create custom generative AI skills for specific business needs through the Now Assist skill kit.

Bill McDermott, CEO of ServiceNow, has remarked that the company's AI solutions represent the fastest adoption rate in its history. This statement suggests that AIaaS contributes significantly to NOW’s overall sales. We don’t have specific figures of how much AI solutions mean in the total picture. However, we have some relevant information. The Now Assist platform, which includes AI capabilities, serves 44 clients with annual contracts exceeding $1 million.

What are investors expecting moving forward? Wall Street analysts project NOW’s revenue growth will strengthen in the upcoming fiscal year. Following the Q3 report, NOW raised its full-year guidance, boosting optimism about the continued strong performance of its AI solutions.

The only thing that can stop NOW from here is weaker results. Investor optimism has been well-founded so far.

IBM

Aswath Damodaran advises mature companies to "act their age." He suggests that established firms should focus on returning cash to shareholders rather than attempting to reinvent themselves. This is because efforts at renewal often result in cash burn without meaningful outcomes.

However, the technology sector presents a unique challenge. In this industry, companies face a critical dilemma: First, if they follow Damodaran's advice and focus solely on shareholder returns, they risk falling behind in innovation. Second, if they fail to keep pace with technological advancements, they quickly become obsolete and face rapid decline.

Big Blue has struggled to keep up with the times and stay relevant. The emergence of AI is welcomed news for the company. IBM has studied AI for a long time, and now this research is paying off, leading to a new start. Stock market performance is a sign of the times, Big Blue is up over 40 % this year when we include dividends.

IBM’s business is split into consultancy and services. Thus, IBM mainly works with its clients to develop domain-specific AI capabilities. Consequentially, IBM is developing a new set of AI agents that combine domain expertise, business logic, and advanced generative AI to boost efficiency and productivity across various business functions. Today, IBM has concentrated its various AI software suites in the watsonx.ai platform.

Watsonx.ai includes both orchestration and development. IBM has developed an orchestration tool for autonomous AI agents. This "supervisor" manages various AI agent suites, allowing users to assign tasks to AI agents using natural language. Alongside orchestration, IBM provides a development toolkit for AI builders to develop agents, offering everything from custom to low-code options. It supports multi-agent orchestration and integration with various tools and frameworks.

So, where does IBM go from here? Top-line growth remains modest. There are bright spots. Subscription revenues grow over 20 % on an annual basis. While AI initiatives generate excitement, their immediate impact on revenue growth isn’t evident. Even though IBM executives express cautious optimism about AI's future growth impact, investors appear to brush this cautiousness aside. Recent market sentiment suggests a widespread belief in AI's potential to drive significant sales growth. Thus, investor confidence outpaces the company's more measured outlook, reflecting high expectations for AI's transformative effect on IBM's business performance.

Obviously, something has to give here. Cautiousness and optimism can’t co-exist forever. Alas, investor enthusiasm might die abruptly if IBM can’t raise revenue growth from a low-digit territory soon. Much will depend on upcoming quarterly results. 2025 can be a binary for IBM in the stock market. If IBM beats its modest expectations, investors can get all that they need to push the stock higher, if the opposite happens, the stock can stall and even fall.

Disclaimer: Important Information for Retail Investors

The information in this blog is for educational purposes only, not financial advice. Investing in stocks carries risks; past performance doesn't guarantee future results. Conduct thorough research and seek advice from financial professionals before investing.

The author is a retail investor, not a licensed advisor. Content accuracy isn't guaranteed due to changing market conditions. All investments have risks, including the potential loss of principal. Assess risk tolerance and goals before investing; diversification is key to managing risk.

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