AI Capex: Risky Business?

Big Tech's massive capital expenditure (capex) in AI infrastructure is under scrutiny, with concerns rising about potential overinvestment and diminishing returns. While markets have thus far rewarded this spending, historical analysis suggests infrastructure booms often lead to excess competition and poor stock performance. Some analysts are drawing parallels to the dot-com era, cautioning that current valuations may be outpacing the sector's fundamentals.

Specifically, the transition of tech giants from asset-light to capital-intensive models is raising eyebrows. Companies like Meta and Alphabet are planning to allocate significant portions of their revenue to capital expenditure, exceeding historical averages. Questions linger whether AI investments will translate into sufficient revenue to justify the costs.

Despite strong earnings from key players like Microsoft, the AI ecosystem faces challenges. While some segments, such as chip manufacturers, are profiting, others, including data centres and LLM developers, are struggling with profitability. The coming months will be crucial in determining whether Big Tech can sustain its market dominance or if the AI boom is creating a bubble.