Investments in AI by Amazon, Meta, and other tech giants could be questionable - historical data suggests potential low returns on investment

In a recent analysis, Philip Straehl, Chief Investment Officer at Morningstar, has raised concerns about the high investments in artificial intelligence (AI) by tech giants and their potential impact on stock returns. Straehl's analysis, published on August 19, 2022, suggests that increased competition due to these investments could lead to lower stock returns.

Straehl's investment philosophy prioritises the price paid for a certain cash flow as the primary driver of investment decisions. He is playing it safe in this market due to historically high investor sentiment and market valuations, and is reducing risk, waiting for more attractive opportunities.

Major tech companies, including OpenAI, Meta, xAI, Microsoft, Google, and others, plan to spend between 1 trillion and 2.2 trillion USD on AI development infrastructure over the next five to ten years. OpenAI alone aims to invest around 500 billion USD by 2029 in its "Stargate" initiative with partners like Oracle and Softbank, including over 12 billion USD on a single data center and about 40 billion USD more on chips from Nvidia.

Bob Doll, Chief Investment Officer at Crossmark Global Investments, agrees with Straehl's analysis and is focusing on free cash flow in his portfolio. Doll shares Straehl's concern about companies that significantly increase their investments, as they may lag until the investments are made and their effectiveness is clear.

According to Straehl, higher investments in AI generally increase supply, potentially making it harder for companies to make money from these investments. The tech giants are engaged in an AI arms race, but Straehl is concerned about the market's high valuation against an uncertain macroeconomic backdrop.

Data from the past 60 years shows that stocks in the top 20 percent of investment expenditures relative to revenue have underperformed compared to the bottom 80 percent. Straehl predicts that this trend will be significant in the long run.

However, it's worth noting that the core businesses of Alphabet, Microsoft, and Amazon are still performing well. Monetizing generative AI will be crucial in the future, and the tech giants are expected to spend $364 billion (€314 billion) on AI development alone in 2025.

Investors are currently brushing off this issue, but Straehl's cautionary stance serves as a reminder of the potential risks associated with the tech giants' heavy investments in AI. Straehl and Doll's analysis suggests a prudent approach, prioritising the price paid for a certain cash flow and being mindful of the potential long-term effects of these investments.

Investments in AI by Amazon, Meta, and other tech giants could be questionable - historical data suggests potential low returns on investment