Investors just can’t seem to hate high AI-related CapEx enough these days. With some of the heavier spenders getting sent straight to the penalty box while CapEx-light AI innovators, most notably Apple (NASDAQ:AAPL | AAPL Price Prediction), get rewarded with fresh new all-time highs, questions linger as to whether all the risks associated with the aggressive, spend-first strategy will be worthwhile.
Sure, there will be glory for the winner, but for how long, given how quickly rivals are moving at the frontier? I guess time will tell, but, for now, it feels like investors are about sick enough with AI spending and the potential impact it could have on margins and, as Moody’s (NYSE:MCO) noted recently, perhaps even credit quality if the “unprecedented” pace continues.
Here we go again: AI CapEx fears are rippling through big tech
Of course, this should come as no surprise, especially given the collective spend could soon exceed $1 trillion across the mega-cap tech titans next year. And with much negativity surrounding Oracle (NYSE:ORCL) and its credit downgrades amid its profoundly aggressive spending on AI data centers, questions linger as to how much is too much and whether overspending really is a bigger risk than underspending in this phase of the AI revolution.
As always, time will tell, but given how investors have punished Oracle shares, it seems like the overhang on the hyperscalers’ stocks might just be suddenly removed if just one of them were to announce cuts to AI spending or, at the very least, some form of cap — a major risk for the semiconductor stocks that I brought up in prior pieces, given that once the spending slows, it probably won’t take too long for investors to call a cyclical top in the top hardware “picks and shovel” plays that have been crushing markets in recent years.
More CapEx, more volatility
Any way you look at it, the negatives of all this AI CapEx are at the top of mind. But, in my view, I think too many are starting to expect the bear case with AI (weak ROIs that demonstrate the spending definitely wasn’t worth it) when the equally likely, at least in my humble opinion, bull case could be in the cards.
Indeed, nobody wants the hyperscalers to be the next Oracle. There are risks associated with letting the credit quality go and perhaps getting too aggressive with CapEx.
At the same time, though, the hyperscalers are massive cash machines that can afford to spend more aggressively, take a bit of a hit on margins over the medium term, and, as they look to take on a bit more debt, maybe take a step down in the credit ratings (I think any such downgrade would be completely unwarranted given the resilience of their cash engines).
While spending is going to make many woozy, especially come earnings season, I do think that underinvesting remains the greater of the two risks, with the exception of a few firms like Apple, which has the installed base that’s large enough such that it can win at little cost by piggybacking off of another firm and building on top of a distilled model at the frontier.
Why spending is a must for firms that aren’t named Apple
After all, Apple has the data moat, the loyal installed base, and the impressive hardware to run seriously impressive AI models on the edge. In a way, Apple is the one firm that can skip to the front of the line (or, at the very least, close to the front) without having to deal with the pains that its Mag Seven rivals are facing.
For the firms that don’t have this luxury, it feels like investing to control all layers of the AI stack is not only a fantastic opportunity to drive next-level growth, but a way to adapt to this new age of tech whereby AI-native is the way to go.
Indeed, AI stands to disrupt the moats of the “moaty” Mag Seven as well, so spending to become AI-native seems like the only way to go, especially since firms that sit back complacently amid the rise of profound new technologies might be the ones that run the risk of seeing their moats fade away over time.
In my view, short-term pain to margins or credit is worth the shot at long-term gain.
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