LIVE MARKETS-The AI investment theme: risks loom, but not a bubble

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

THE AI INVESTMENT THEME: RISKS LOOM, BUT NOT A BUBBLE

Analysts at Barclays believe AI as an investment theme remains on a solid footing with demand for compute still outstripping supply, but still highlights some potential worries around the corner.

Hyperscalers - such as Amazon, Microsoft and Google - have been increasing their capex by hundreds of billions per year to meet computing demand, but in a recent note, Barclays highlights some “what-ifs” for the sector should capex slow or even turn negative.

“If data center (DC) capex were to decline 20% over the next two years, instead of growing 30% y/y, we estimate that the S&P 500 would have a 3-4% headwind to FY26 EPS, all else equal,” Barclays says.

“Simultaneously, we would expect the index to de-rate by 10-13% as multiples for DC capex beneficiaries, hyperscalers and other AI stocks compress.”

So what could cause capex to decline? Barclays highlights power constraints, a slowdown in the advancement of AI models and funding needs outpacing cash generation.

Operating expenses are also rising due to competition for talent and as companies spend billions acquiring AI start ups to secure critical expertise.

“After a few 'years of efficiency', operating costs within mega-cap Tech are once again climbing and, unlike capex, these are a direct headwind to earnings,” Barclays notes.

But, while Barclays believes these misgivings are valid to some degree, they still favour the other side of the coin.

“The tech infrastructure build-out is on much stronger financial footing today than it was 25 years ago,” Barclays says, in reference to the dotcom bubble.

“Importantly, hyperscalers have also maintained a conservative capital structure throughout this expansion.”

With signs that AI adoption is underway at a “healthy pace”, Barclays remains positive.

“AI as an investment theme remains on solid fundamental footing,” they say.

(Samuel Indyk)

EARLIER ON LIVE MARKETS:

CITI ON EU AUTOS: 'NO SECTOR IS EVER UNINVESTABLE' CLICK HERE

EUROPEAN SHARES SOFT, REMAIN IN NARROW RANGE CLICK HERE

EUROPE BEFORE THE BELL: FUTURES STEADY, MARKETS AWAIT CATALYST CLICK HERE

STOCKS TAKE A BREATHER CLICK HERE