Investment Insight

Pic of the Week

There’s been one quite consistent question on the lips of investors over the past couple of months: are we in an AI bubble? Both the quantum and evolving source (moving from free cash flow to debt- or vendor-funded) of the colossal investment in AI has investors wondering if it will, ultimately, lead to increased profitability. The answer is: it depends. There will be winners but also some spectacular losers. One of the current and, if Wednesday’s results announcement is to be believed, future winners is Nvidia. They announced a continuation of their phenomenal revenue growth with no end in sight. While there will inevitably be a lot of wasted AI investment, AI fundamentals continue to improve in aggregate. The three largest cloud computing platforms, Amazon, Google, and Microsoft, collectively reported accelerating segment growth of 28.5% year-on-year, 3% greater than in the prior quarter. As a group, these so-called hyper-scalers are, according to consensus estimates, expected to generate US$273 billion in cloud computing revenues this year – a nearly fourfold increase in the last five years. Of equally keen interest to the market, operating margins for their cloud activities 2.1% quarter-on-quarter to 35.2%. As the chart shows, the aggregate picture is supportive. However, in the coming months we are likely to see investors become more discerning, supporting companies who are showing evidence of being on a path of growth and profitability in their AI business and eschewing those with less convincing evidence.