We’re entering a new pricing environment for software: AI vs non-AI. It’s only happened in the last few weeks.
Recent earnings have pushed some of the most important companies to all-time highs.
| Company | Performance |
|---|---|
| Confluent | 34% |
| Cloudflare | 21% |
| ServiceNow | 20% |
| Microsoft | 14% |
This dynamic doesn’t favor everyone.
Theory created a public market AI index to track software companies who have significant product plans or current AI businesses.
AI companies trade at 2.5x the multiple of non-AI companies in the public market.
This yawning difference should compound over time as the adoption of AI is still relatively early – we’re only 18 months into it. In addition, the productivity gains & the concomitant willingness to pay for them is just getting started.
Microsoft & ServiceNow have reported 70% & 50% improvement in productivity in their organizations.
This dynamic is permeating the early stage private markets just as rapidly with the return of the 100x ARR multiple for AI companies.
| Type | Mean Projected Growth Rate |
|---|---|
| Non-AI | 14% |
| AI | 23% |
The reason is the expected growth rate. AI software companies are projected to grow 63% faster in 2024 than non-AI software companies because of customer demand.
We should expect an elevated valuation environment in Q1 & Q2 as the buyer population expresses strong demand for AI.
