Big Tech’s top names announced outsized AI capital expenditures, including Alphabet (GOOG), (GOOGL) and Amazon (AMZN); now both stocks are in the red as the tech sell-off has not fully recovered.
“This huge boost to capex has some negative ramifications for the market,” said Investing Group Leader Bret Jensen from The Biotech Forum in a recent analysis. “Almost all the EPS growth in the market over the past three years has come from the Magnificent Seven. Obviously, a huge boost to capex is going to ding that growth in the coming quarters. Increased expenditures will not be matched with increasing AI-related revenues, at least in the short and medium term.”
In addition, “valuations are at extreme levels viewed from a historical lens and are not pricing in the increasing warning signs for the market,” Jensen said.
Nvidia (NVDA) CEO Jensen Huang, however, said these investments are justified due to the increased cash flows the companies will start seeing.
This increased AI spending for Alphabet (GOOGL), (GOOG)—which is estimated to be between $175B and $185B—for example, is estimated to benefit other companies such as Broadcom (AVGO), Nvidia (NVDA), and Advanced Micro Devices (AMD).
Amazon (AMZN) is also well positioned to be a leader in public cloud infrastructure, according to Seeking Alpha analyst The Asian Investor, in another analysis. “The 10% drop [on Thursday] is entirely undeserved.”
“I maintain that Amazon will continue to grow rapidly going forward, and I see the drop as a golden buying opportunity for investors seeking cloud exposure,” the Asian Investor said. “The drop constitutes a buying opportunity and creates a more attractive risk setup for investors seeking cloud-related growth potential.”
However, Seeking Alpha analyst Alex King of Cestrian Capital Research gave a stark warning: “Don’t be all-in on crypto or high-beta stocks, and don’t be overleveraged.”