Despite concerns about mounting expenses and delayed profitability, major US tech companies are significantly increasing their investments in AI infrastructure. This renewed focus on AI spending is driving optimism on Wall Street, with analysts revising their estimates upwards for key players in the AI space.
Big Tech's unwavering commitment to its capital expenditure plans for artificial intelligence is igniting optimism on Wall Street . Analysts are revising upward their projections for key players in the AI landscape, even after the emergence of China's rival DeepSeek lab briefly rattled the market.
US technology giants Amazon, Microsoft, Google, and Meta Platforms are each significantly increasing their investments in AI-related capital expenditures, despite concerns about escalating expenses and the delayed profitability payoff. The anxiety surrounding China's entry into the AI arena has only intensified the urgency for these companies. They are heavily reliant on substantial investments in AI infrastructure, such as data centers and graphics processing units (GPUs), to fuel greater computing power and, ultimately, revenue generation. Combined spending from these four tech behemoths is projected to surpass $315 billion in their current fiscal year. Morgan Stanley analyst Brian Nowak has updated his capital expenditure forecast for these four hyperscalers, anticipating spending will escalate to $367 billion by 2026. While he supports the fundamental rationale behind Big Tech's investments, he acknowledges that questions regarding the return on invested capital 'will remain in focus.' Morgan Stanley also reaffirmed Nvidia as a top pick earlier this week.Faster capex growth has been observed by UBS, which raised its estimated 'Big 4' capex spending this year, forecasting a 35% year-over-year increase, up from a previous estimate of 25%. This implies their combined capex should reach over $300 billion this year, significantly exceeding their commitment for 2024 and more than double the amount from the year prior. UBS equity strategist Sundeep Gantori stated in a Thursday note to clients, 'Contrary to the general perception that low-cost models like DeepSeek will result in near-term cuts to AI capex, we are actually raising our Big 4 capex estimates based on solid big tech guidance during the 4Q24 reporting season and a strong demand outlook for frontier models,' Gantori said. 'We believe the recent correction in AI compute stocks is overdone,' Gantori added. According to Gantori, the recent correction in chipmakers Nvidia and Broadcom was overblown, considering the robust trends in AI adoption and compute spending. Nvidia and Broadcom were among the hardest hit during the brief tech sell-off on January 27th, fueled by concerns over Chinese startup DeepSeek's low-cost AI model that utilized less efficient Nvidia chips to create a chatbot challenging OpenAI's ChatGPT. Nvidia shares have declined roughly 8.2% over the past month, following a nearly 17% drop on the day of the tech sell-off. Meanwhile, Broadcom plunged more than 17% that day and remains in the red for the year. Both Nvidia and Broadcom have since rebounded due to a 'buy the dip' mentality in AI stocks. 'Investors can take advantage of heightened volatility through structured strategies and by buying the dip in quality AI stocks, as we believe the focus will eventually return to robust fundamentals,' Gantori said.Analysts at Melius Research identified Nvidia, Broadcom, Marvell Technology, and Arista Networks as beneficiaries of increased capital spending, which the firm believes will continue to drive demand for GPUs, custom silicon, and networking. Monetization, the eventual conversion of these billions in investments into revenue-generating assets, will be a crucial focus for hyperscalers moving forward, Melius noted. 'The initial reaction to the 'DeepFreak' seems to spend more, not less,' Ben Reitzes, head of technology research at Melius Research, wrote in a Friday note. 'The issue for the big clouds is how to monetize AI faster as free cash flow takes another big hit. Real free cash flow matters,' Reitzes added.
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