Is cutting AI spending more beneficial? Bank of America gives a counterintuitive judgment: although “unpopular,” it may extend the economic cycle, and chip stocks could enjoy a longer profit runway.
Bank of America: Chip companies cutting capital expenditures may be “unpopular,” but it could extend the earnings cycle.
According to Zhihui Finance APP, recent market concerns have been rising, stemming from the US midterm elections, worries about increasing costs of artificial intelligence infrastructure, and doubts about the sustainability of this spending boom. Bank of America stated that although any form of spending cuts may be seen as an "unwelcome" signal by investors, in reality, it could actually extend the spending cycle.
The bank’s analysts presented a contrarian argument: if monetizable AI demand remains strong while capacity growth slows, this could actually boost the supply capability of computing power and delay the peak of the AI cycle.
"A slowdown in supply growth combined with resilient demand may increase utilization, support pricing, and reduce the risk of overbuilding," the bank’s analysts wrote in a note to clients. "The result could be a lower peak in profitability, but a longer earnings runway, and for chipmakers already priced for a ‘cycle ending soon,’ potentially higher valuation multiples."
The bank remains bullish on NVIDIA (NVDA.US), AMD (AMD.US), Broadcom (AVGO.US), Marvell Technology (MRVL.US), Credo Technology (CRDO.US), Lam Research (LRCX.US), KLA Corporation (KLAC.US), Micron Technology (MU.US), Analog Devices (ADI.US), and Texas Instruments (TXN.US).
Furthermore, the bank noted that recent financial reports from hyperscale cloud providers highlighted the "resilience" of AI demand, with the combined long-term contract backlog for these companies reaching $2.5 trillion. Additionally, the growth rates for Amazon (AMZN.US) AWS, Microsoft (MSFT.US) Azure, and Google (GOOGL.US) Cloud platforms reached 39%, 49%, and 100% respectively. With capacity constraints, token processing volume increased more than tenfold year-on-year, while the rental prices for Hopper and Blackwell rose by 33% and 51% respectively this year (SpaceX recently indicated that current spot pricing supports about a one-year investment payback period).
Other noteworthy data points include: Fortune 500 companies' spending on Amazon Bedrock increased more than sevenfold year-on-year; the number of Microsoft customers with over 50,000 Copilot seats grew eightfold (Copilot daily active users rose 50% month-on-month).
Recently, investors have expressed concerns about cash flow—specifically the free cash flow of eight US hyperscale and emerging cloud providers. Free cash flow consumption is expected to expand from $128 billion in 2026 to $335 billion in 2027. However, analysts believe investors may be "missing the forest for the trees."
"The calendar year 2027 may mark a peak in cash burn, and by 2028, the deficit will narrow to $77 billion, representing 2% of sales—a $258 billion improvement," analysts added. "Financing remains a central issue, but the ecosystem's free cash flow offers another potential release valve: the combined free cash flow for NVIDIA, Broadcom, and Micron is expected to reach about $577 billion in 2027, and over $800 billion in 2028 (though they will still face further supplier financing and round-tripping risks)."
"Therefore, the market seems to have already priced in capital expenditure risks ahead of any visible cracks in demand data," the analysts continued. "In our view, if paid AI demand remains resilient, lower capital spending can reduce overbuilding, maintain scarcity, extend the earnings-per-share cycle, and support higher valuation multiples."
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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