Hyperscalers face analyst caution

Redburn analyst Alexander Haissl has downgraded both Amazon and Microsoft from Buy to Neutral, signalling a more cautious outlook on hyperscalers. This contrasts with the broader market which still largely favours these tech giants. The analyst suggests that the economics of the new AI cloud wave are weaker than anticipated, with increased capital expenditure and slower profit growth potentially impacting earnings.

Specifically, the deployment of graphics processing units (GPUs) demands approximately six times more capital to yield the equivalent 'cloud 1.0' value, presenting skewed downside risks. Investors may be overestimating the benefits, pricing in heavy spending as if it guaranteed cloud 1.0-level returns, despite the absence of a clear path to achieving such economics.

Haissl has reduced Microsoft's price target from $560 to $500, implying a potential downside of 1.5%, while maintaining Amazon's price target at $250, suggesting a 7.4% upside. This downgrade marks the first by Rothschild & Co Redburn since June 2022, diverging from the generally positive sentiment surrounding the 'Big Seven' tech companies.