Analysts: AI-driven capex is due for a reality check

Four years ago, the capex of large-scale data center companies, better known as hyperscalers, was about 12 percent of revenues. Propelled by the promises of AI, this number has grown to 17 percent in the third quarter of 2024 and probably continues to rise. One of two things will now happen. One: the investment level proves unsustainable and will come back down. Or two: a new normal will establish itself at a significantly higher capex-to-revenue ratio.

Jim Handy of Objective Analysis thinks it’s the former. “If it shifts from a steady state of 12 percent to a steady state of 17 percent, then the return to the shareholders probably is going to be lower, and that would drive down the stock price. That goes against what the CEOs of these companies are trying to do,” Handy said in a video discussing his 2025 semiconductor market forecast.