The latest quarterly earnings season brought a new wave of enthusiasm around artificial intelligence, but also some concerns about margin pressure
The latest quarterly earnings season brought a new wave of enthusiasm around artificial intelligence, but also some concerns about margin pressure due to large infrastructure spending needed to support this nascent technology, according to analysts at Aubrey Capital Management.
Investors are eager to see a return on these large-scale spending, especially among mega-cap "hyperscalers" looking to integrate AI into their offerings.
Oracle bore the brunt of these concerns, with shares of the cloud software giant falling nearly 44% after a surge in September. At the time, Oracle shares had surged on the announcement of a $300 billion contract with OpenAI, the company behind the popular chatbot ChatGPT, but traders later questioned OpenAI's ability to deliver on its commitments and Oracle's debt-financed data center construction.
In a note to clients, Aubrey analysts argued that while AI investments were previously greeted with enthusiasm by the market, "this trend has been broken, and not all capital expenditures are created equal."
"When companies like hyperscalers use accumulated cash to invest, they are rewarded, while those using debt are subject to scrutiny. Clearly, investors are becoming more selective," they noted.
Nevertheless, Aubrey analysts stated that much of the hyperscalers' spending increase is "justified by very strong operating performance," with software giant Microsoft and Google parent Alphabet both increasing their cloud revenue by double-digit percentages. Meanwhile, the core advertising business of Meta (designated an extremist organization and banned in Russia), the owner of Facebook, grew by 26%, they noted.
"These metrics have become an integral driver of AI capital expenditures, with hyperscalers' operating cash flows accounting for 60% of AI spending," the analysts wrote. "Given the hyperscalers' strong performance, this has given investors renewed confidence that the beneficiaries of all this spending will continue to deliver strong results."
According to the analysts, Meta, Microsoft, Alphabet, and e-commerce giant Amazon are expected to collectively spend more than $480 billion on capital expenditures in 2026, representing approximately 60% of total industry spending on AI. They added that many expect this figure to increase even further "by the end of the year."
"This should strengthen the fundamentals by early next year, but deeper questions remain about the speed of enterprise adoption and when the technology will be good enough to replace a broader spectrum of the workforce," the analysts stated.