AI Stock Boom Slows Amid Concerns Over Valuation and Profitability

Meta's shares fell despite strong earnings due to concerns over AI investment plans. Microsoft and Alphabet's AI investments were rewarded by investors, who are growing wary of funding speculative AI projects.

Waqas Arain
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AI Stock Boom Slows Amid Concerns Over Valuation and Profitability

AI Stock Boom Slows Amid Concerns Over Valuation and Profitability

The artificial intelligence (AI) stock boom is showing signs of slowing down as investors grow increasingly concerned about the valuation and profitability of AI companies. Despite big tech firms like Meta, Alphabet, and Microsoft planning to increase spending to compete in AI, recent earnings results have sparked worries on Wall Street.

Why this matters: The slowdown in the AI stock boom has significant implications for the entire technology sector and the broader market, as the performance of these giant tech companies can impact the overall economy. Furthermore, the concerns over valuation and profitability of AI companies may lead to a shift in investor sentiment, affecting the flow of capital into innovative technologies.

Meta, the parent company of Facebook, reported strong first-quarter earnings, with revenue rising 27% year-over-year to $36.5 billion. However, the company's plans to invest heavily in AI projects, with capital expenditures expected to reach $35-40 billion this year, led to a significant sell-off in its shares. Investors are growing wary of funding speculative "moonshots" that promise profits at a distant future date, particularly in an era of high bond yields.

In contrast, Microsoft and Alphabet have been rewarded by investors for their AI investment plans, as both companies have a clearer path to turning the technology into higher profit margins. The combined capital expenditure of Microsoft, Alphabet, Meta, and Amazon is expected to reach $205 billion in 2024, a 40% jump from 2023, with most of the incremental spending focused on AI-related infrastructure.

Despite the potential of AI, concerns are mounting over thevaluations of the"magnificent seven" tech giants, which include Nvidia, Meta, Apple, Tesla, Amazon, Alphabet, and Microsoft. These companies have grown so enormous that their performance significantly impacts the entire market. Katie Martin from the Financial Times notes that even if AI does transform the world, the ultimate beneficiaries might emerge in unexpected places such as healthcare or banking.

Furthermore, US stocks are historically expensive, with a cyclically adjusted price-to-earnings (CAPE) ratio that is a popularvaluation metric. This suggests that investors may be overpaying for stocks, including those in the AI sector. As James Mackintosh from The Wall Street Journal points out,"Wall Street's patience for the costly artificial intelligence (AI) arms race iswaning."

While the AI stock boom may be slowing down, there are still many positives in tech fundamentals that support the investment case for generative AI. Accelerating cloud growth suggests increased AI monetization, and big tech companies are expected to generate $560 billion in free cash flows in 2025, a 22% growth from 2024. However, as the hype around AI stocks cools and valuations come under scrutiny, investors are becoming more discerning about the sector's growth prospects and profitability.

Key Takeaways

  • Ai stock boom slows down due to valuation and profitability concerns.
  • Meta's AI investment plans lead to sell-off, while Microsoft and Alphabet are rewarded.
  • Combined capital expenditure of big tech firms to reach $205 billion in 2024, mostly on AI.
  • Concerns mount over valuations of "magnificent seven" tech giants and US stocks being historically expensive.
  • Investors become more discerning about AI sector's growth prospects and profitability.