Analyst: Investors' panic over AI infrastructure spending may have already peaked

According to Barton Crockett, a senior analyst at Rosenblatt Securities, major hyperscale data center operators have reached the “peak of negative sentiment” as investors express concern about their massive spending.

In an interview, Crockett said that although the capital expenditures of Amazon (AMZN.US), Google (GOOGL.US), Meta (META.US), and Microsoft (MSFT.US) have risen significantly, this is expected to improve as spending levels level off. The concerning data: the four leading hyperscale data center operators’ total capital expenditures are up about 66% year over year, Crockett said, adding that this surge is “basically eroding these companies’ free cash flow.”

However, he believes the most anxious period for investors may already be behind them. Crockett said, “I think what you’re most worried about now is spending—and whether they can turn that spending into profits.”

Compared with hyperscale data center operators, Apple (AAPL.US) stands out for its relative stability. The company “doesn’t put as much capital expenditure into massive data centers as hyperscale data center operators do,” which allows it to respond more effectively to current market turmoil.

Crockett described Apple’s ability to remain steady amid soaring memory costs and supply-chain issues as “a kind of flexibility,” reflecting the company’s strength, and added that the recent announcements are consistent with a significant improvement in gross margin over the coming months.

Among hyperscale data center operators, Crockett listed Meta as his top pick, citing strong revenue growth and expectations of attractive investment returns. He also noted that if Amazon can “cut through the competitive noise with Anthropic,” then Amazon is an interesting investment opportunity.

The analyst believes the current hardware-driven cycle may give way to rising shares in service and software companies.

Crockett maintains a “Hold” rating on Netflix (NFLX.US), calling it “a company well managed in an increasingly mature market environment.” He noted that although the company’s EBITDA growth rate is about 20%, as younger audiences shift to user-generated content platforms, Netflix’s competitiveness on those platforms has declined, along with the challenges that come with it. He said Netflix’s viewership growth is no longer “rocket-like.”

Looking ahead, Crockett predicts that as hyperscale data center operators start to “squeeze revenue out of the investments they’ve been making,” the narrative in the tech sector will shift. He said he is confident that next year’s capital expenditure growth will not repeat last year’s two-thirds surge, which could create a more favorable environment for these companies to transition from heavy spending to generating revenue.