Rothschild and Co.’s Redburn downgraded both Amazon (AMZN) and Microsoft (MSFT) to Neutral from Buy, as the financial firm does not believe the current titanic investments in artificial intelligence-related infrastructure will produce returns justifying the expense.
“At first glance, Gen-AI gross and operating margins are not alarming – gross margins even resemble those seen in the early days of cloud 1.0,” said Redburn analyst Alex Haissl in an in-depth report published Tuesday. “However, that comparison is misleading. Gen-AI margins already assume longer depreciation schedules of 5-6 years, versus just three years in the early cloud era. On a like-for-like basis, this means capital intensity for Gen-AI is significantly higher, while pricing power is notably weaker.”
Redburn’s analysis finds the net present value for the current generative-AI buildout equates to $0.20 for every $1 spent. In comparison, mature cloud 1.0 investments generate about $1.40 per $1 spent.
“Another key difference is where the value accrues,” Haissl said. “During cloud 1.0, hyperscalers captured much of the software-layer economics themselves. In the Gen-AI era, that value increasingly flows to model providers like Anthropic (ANTHRO) or OpenAI (OPENAI), creating value leakage for the hyperscalers, at least for the foreseeable future.”
Cloud 1.0 refers to the initial rise of cloud computing, which ranged from about 2010 to 2020. It included basic on-demand services like compute, storage and databases.
“The key difference between early cloud 1.0 and Gen-AI lies in their underlying economics,” Haissl noted. “Cloud 1.0 was built on commoditised hardware serving millions of customers, which allowed hyperscalers to achieve pricing power at relatively low cost.”
“Gen-AI, by contrast, relies on expensive hardware and is largely consumed by startups – an audience over which the industry has little pricing leverage,” Haissl added. “Whether this lack of pricing power is deliberate (to attract future winners) or simply necessary (because higher prices would deepen startup losses) is secondary – the outcome is the same.”
Although Redburn said it’s not yet bearish on the rise of AI infrastructure, it is also not bullish, hence the downgrades to Neutral from Buy. It has a $250 price target on Amazon and a $500 target on Microsoft.