SAP, IBM Earnings Offer Insight into This AI Holding

Shares of SAP SE (SAP) are little changed, while the shares of IBM (IBM) are back at mid-September levels. Granted, we don’t have a dog in either fight, but what we found in reviewing their quarterly earnings and conference calls tells us that AI adoption continues.

Nice confirmation, but also a yardstick ahead of quarterly results from ServiceNow (NOW) next week. The collected comments also help explain why Microsoft (MSFT) and others are likely to remain capacity-constrained well into 2026 if not later.

That adds to the thinking we shared on Wednesday that Big Tech companies are likely to deliver another round of capital spending increases when they report next week. If we’re right, that revelation will be a nice catalyst for multiple Portfolio holdings, ranging from Nvidia (NVDA) and Marvell (MRVL) to Arista Networks (ANET) and Eaton (ETN) .

With our larger thoughts shared, let’s get into what SAP and IBM had to say…

SAP SE

Inside its September quarter results, SAP called out that its cloud revenue rose 27%, marking the fifth consecutive quarter growing above 25%. The reason?

"AI adoption is going up significantly because end users are consuming SAP Business AI at a higher frequency and across a broader scope."

That’s the comment shared by SAP management, and it used the following as examples as to why that adoption is happening:

"Johnson Controls saves 3,000 hours annually by automating routine IT system monitoring with our IT agent. Bosch saves 2,500 hours per customer service center per year with our services agent. JK Cement from India has cut the time for purchase-related processes by 50% with our sourcing agent."

Those examples and others we’ve shared point to companies leveraging AI to drive productivity, but as we’ll see with IBM’s comments, that drive is happening inside the company as well as with its customer base.

IBM

When we peer through IBM’s results and conference call, it’s clear its revenue stream is benefiting from AI adoption but continued cloud adoption as well:

"Software growth accelerated to 9%, led by strength in Automation. Automation was up 22%, highlighting our end-to-end portfolio of leading solutions that optimize operations, automate infrastructure and workflows, build resiliency, and drive cost efficiency for clients. Many of our Automation products are infused with AI, enhancing their capabilities.

"GenAI, to your point, over 22% of our backlog, 30% of our signings, 12% of our revenue, that's what's inflecting the growth overall.

"Our consulting generative AI book of business accelerated to over $1.5 billion in the quarter, with the number of projects more than doubling year-to-year, underscoring our momentum."

But as we teased above, IBM is also flexing AI internally to drive productivity and savings:

"AI is also a powerful productivity driver for IBM, contributing to our strong financial performance. In 2023, we set out on a goal to achieve $2 billion of productivity savings. And today, we are well ahead of that with an expectation of $4.5 billion of annual run rate savings exiting this year.

"As we deploy AI at scale across IBM in areas including finance, supply chain, sales, HR, service delivery, and customer support to improve efficiency and reduce costs. While we have made progress on this journey and expect $4.5 billion of run-rate savings exiting this year, there is still a significant opportunity ahead for us to drive even more efficiency and cost savings."

We’ve talked about this with regard to Meta (META) , Alphabet (GOOGL) and others that are implementing AI solutions to address their cost structure, squeezing incremental costs out of the business, driving margins and cash flow higher.

The Bottom Line

Figures above and those like them tell us AI adoption and usage levels are continuing to rise. In turn, that drives cloud and data center usage, which helps explain the continued capacity crunch we are hearing about. Backlog levels and the mix of AI business they contain point to further adoption and usage in the coming quarters, which likely means additional capital spending will be needed not only for AI and data center, but also the digital networks that connect them with their customers.

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At the time of publication, TheStreet Pro Portfolio was long NOW, MSFT, NVDA, MRVL, ANET, ETN, META and GOOGL.