The four largest technology companies in the United States, which are leaders in the field of artificial intelligence (AI), will invest an unprecedented $650 billion in data centers and other AI-related infrastructure this year. This is approximately four times Slovakia's estimated GDP for this year.
Investors are taken aback by the scale of these investments and are no longer applauding them as they did last year, when they saw them as a sign of a much-desired innovative approach. Now, after another 60 percent year-on-year increase, they see them more as a sign of a certain obsession.
Investors are simply afraid that none of the four giants—whether Amazon, Alphabet, Microsoft, or Meta—wants to be left behind, so they are pouring hundreds of billions of dollars into a potential black hole with a certain obsession. Just so that the competition doesn't get ahead of them.
Symptoms of the FOMO (Fear of Missing Out) effect [a psychological phenomenon where a person feels anxious or uncomfortable that they are missing out on something important while others are experiencing it, editor's note], which less experienced small investors commonly succumb to, are, in the case of large technology giants, a consequence of their dual relationship to the phenomenon of artificial intelligence.
On the one hand, it represents an opportunity to historically rise above everyone else in the technology industry as the winner who takes everything, but on the other hand, that same artificial intelligence poses an existential threat to them.
This duality is particularly evident in the case of Microsoft, which is investing heavily in artificial intelligence. However, this also poses a fatal threat to its software products, which have largely defined the entire era of modern personal computing to date.
The more money goes into huge investments in AI, whose return on investment is increasingly questionable given their massive growth, the less remains for share buybacks or dividends. Instead, tech giants are becoming huge debtors.
Investors are not happy about either of these developments. That is why the shares of tech giants are already reacting to the announcement of further new investments with a decline. The whole situation is complicated by the fact that even the aforementioned leaders in the field of artificial intelligence are unable to answer the crucial question of when their investment will pay off.
For investments to pay off sufficiently from the investors' point of view, their increasingly massive scale requires more and more evidence of their clear profitability. This includes the fact that artificial intelligence will "solve or even destroy" the current software segment. And thus its key players, such as Adobe or ServiceNow. Or Microsoft's "software divisions."
Investors still believe that this will happen. However, the longer doubts about the return on massive investments in AI persist, the sooner they may take the shares of software giants back into favor. Especially those that can benefit from artificial intelligence themselves after appropriately adjusting their business models.
Software stocks could therefore be in for a brutal rally, according to investment bank Jefferies. BlackRock's exchange-traded fund, which focuses on software stocks, saw its biggest sell-off in nearly a quarter of a century last week.
Such negative sentiment towards a specific segment, as is currently prevailing in relation to software, is said to be rare. Investors are now selling off software stocks without thinking and in such droves that even the head of Nvidia shook his head in disbelief this week.
But investors have been gripped by panic that artificial intelligence will completely decimate software companies. The panic is apparently at a particularly advanced stage, as investors are also flocking to sell off stocks that are relatively far removed from pure software and may even benefit from artificial intelligence.
The historically record sell-off of software stocks is a key source of their significant undervaluation, which, according to the financial company Morningstar, is already such that investors should definitely not overlook it. According to analysts at the aforementioned company, Microsoft shares have the potential to appreciate by 50 percent in the foreseeable future, while ServiceNow shares could even rise by 100 percent.
The text was originally published on the website lukaskovanda.cz.
