- Tech investors are shifting from AI semiconductor stocks to cheaper value stocks amid AI fatigue
- Memory makers have outperformed hyperscalers like Amazon, Meta, Alphabet since early 2023
- Hyperscalers increased capex to 92% of operating cash flow, boosting investor optimism so far
Tech investors are increasingly moving out of AI-linked semiconductor stocks due to an apparent 'AI fatigue' and finding opportunities to rotate into cheaper 'value' names which have not been part of the AI trade, global brokerage Jefferies pointed out in a note.
Does it mean that the AI frenzy has come to an end once and for all? Well... not quite. Jefferies still believes that the AI capex race is far from over.
Citing example of the KOSPI index, which has fallen 22% from its June 19 peak, Jefferies classified such corrections as both "natural and healthy".
However, the brokerage noted memory makers (such as Sandisk, Micron, SK Hynix) have outperformed hyperscalers with the likes of Amazon, Meta Platforms, Alphabet, and others.
ALSO READ: Meta Takes Down AI Image Feature After User Privacy Backlash, Says Muse 'Missed The Mark'
"The four hyperscalers have risen by 180% since the start of 2023, compared with a 760% gain for the three dominant memory makers, namely Micron, Hynix and Samsung Electronics," Jefferies outlined.
As long as the AI capex race continues, the beneficiaries will remain "the picks and shovels trade"; in other words the people being paid for the capex not the companies spending the money
According to the brokerage, this is something that traders have understood now. They are, therefore, betting harder on DRAM manufacturers.
The Earnings Test: Will Meta, Amazon, Alphabet & Microsoft Pass?
Earnings, which begin on July 22, will put hyperscalers to the valuation test. These companies have already scaled their projected capex to a massive 92% of their projected operating cash flow during the last earnings season.
Contrary to expectations, the projection proved to be a bullish catalyst for almost each of them. This is because investors perceive Alphabet, Microsoft and Amazon as direct beneficiaries of AI capex spending via their cloud computing divisions.
A lens which, unfortunately, bypassed Mark Zuckerberg's Meta Platforms, according to Jefferies. Nonetheless, investors are growing wary of whether any of these companies will ever successfully monetise their AI capex. Jefferies flags a real possibility of none of them being able to do it.
ALSO READ: SK Hynix's US Debut Sparks A Frenzy Of Leveraged ETF Filings On Wall Street
Big Borrowing Bane?
In addition to spending their cashflow, all these four companies, (with the exception of Microsoft Corp) are also increasingly borrowing money.
The four major US hyperscalers have issued $169 billion worth of bonds so far this year, including $25 billion of Amazon bonds issued recently, compared with $83 billion in 2025, according to Bloomberg.
"Alphabet, Amazon and Meta issued US$52bn, US$92bn and US$25bn year-to-date, while Microsoft has not yet issued any bonds. In addition, Oracle has also issued US$25bn of bonds year-to-date," Jefferies highlighted.
What Does The Future Hold?
Jefferies estimates AI capex by hyperscalers will total about $700 billion this year, exceed $800 billion next year, and surpass $1 trillion in 2027 when Oracle, OpenAI, Anthropic and neo-cloud providers are included.
"The hyperscalers have underperformed the S&P 500 by 11% since early May and are down 8.7% from the peak reached in late May on a market capweighted basis," Jefferies underlined.
Going ahead the hyperscalers' share price performance, both in absolute and relative terms, will remain crucial to monitor as massive selloff risks by traders grow on concerns surrounding lack of AI capex monetisation.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.