We've Reached the Capital Misallocation Phase of the AI Revolution
This month, the market is seeing fears grow around what AI will bring to several sectors.
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I continue to be impressed with the resilience of the markets despite Thursday’s sell-off in equities.
Crypto investors have endured approximately $2 trillion in losses from their holdings in Bitcoin, Ethereum and other cryptocurrencies since their highs in October with few, if any, ramifications to this point to the overall market. Well, besides Strategy Inc. (MSTR) having an over 70% decline in its share price since mid-summer. Maybe it is my age speaking, I will turn 60 later this year, but I still remember when $2 trillion was "real money."
Worries around AI disruption has recently functioned like a selective weed whacker to different sectors of the market.
First, there was the "SaaSpocalypse" that took over $275 billion of market cap off the industry in a single day. The software sector is now sporting its collective lowest PE ratio since 2014. This week, concerns around potential future disruption have "pruned" wealth management firms like The Charles Schwab Corporation (SCHW) , logistical and trucking firms like J.B. Hunt Transport Services (JBHT) as well as real estate brokerages like CBRE Group, Inc. (CBRE) . Where will the scythe of the ghost of future AI strike next?
Meta Platforms (META) , Amazon (AMZN) , Alphabet (GOOG) and Microsoft (MSFT) are slated to spend, collectively, nearly $700 billion in capex in 2026. This is roughly twice the AI related revenues Morgan Stanley projected across the industry in 2030!
Most of this additional spending will go to building out massive AI data centers and associated infrastructure and components. This is up sharply from the just over $350 billion these four tech giants spent last fiscal year. Obviously, this will boost U.S. GDP growth significantly in 2026. It is also a big tailwind for those firms that will participate in this epic buildout.
However, investors do not appear to be factoring in the potential negative ramifications from these spending levels. To me, they signal that we are in the capital misallocation phase of the AI revolution. This has happened at the late stages of every major technology paradigm shift in American history from the buildout of the national railroad network that resulted in the Panic of 1873 to the Internet Bust at the start of this century.
The huge ramp up in AI spending is starting to have negative impacts on balance sheets and cash flows. As was noted on the Daily Diary on Thursday, Meta will absorb $6.5 billion in additional interest costs to finance a good chunk of its AI buildout using special purpose vehicles. Amazon’s free cash flow is projected to be just north of $15 billion in the red in 2026 as it bumps ups its capex by nearly $70 billion this year. Oracle (ORCL) is staring at several years of over $20 billion in annual negative cash flow, according to a recent analysis on Bloomberg.
Reduced cash flow will lead to lower profit growth, at least in the short term. There will also be less funds available for stock repurchases. Neither of these factors seem priced into the market. However, investors do finally seem to be waking up to the reality here in February that AI might have significant disruptions throughout the economy and markets.
I have touched on AI in all three of my columns this week as I fear many lessons from the Internet Boom have been forgotten by too many. Next week, I will go back to trying to highlight relative bargains in what I continue to view as an overbought equity market.
At the time of publication, Jensen was long AMZN.
