Amazon, Microsoft Stock Downgraded, Can't Hit Expected Returns: Analyst

Core Viewpoint - An analyst from Rothschild & Co Redburn has downgraded the ratings for Amazon and Microsoft, citing concerns that the current market valuations are based on outdated "cloud-1.0" economics, which may not apply to the more costly generative AI landscape [1][3][4] Company Analysis - The analyst, Alex Haissl, believes that the AI boom will not replicate the low-cost structure that benefited Big Tech in the 2010s, indicating that the costs associated with AI investments are likely underestimated by investors [2][5] - Amazon and Microsoft are projected to spend approximately $349 billion in capital expenditures (capex) this year, with a significant portion allocated to AI infrastructure [4] - The cost of AI hardware is substantial, with GPUs costing around $40 billion in capex per gigawatt of power, while generating only about $10 billion in revenue per gigawatt [4][6] Market Dynamics - The lifespan of AI chips is relatively short, which could lead to projects becoming "value destructive" if GPUs need to be replaced every three years, further increasing costs [6] - Hyperscalers like Amazon and Microsoft have limited pricing power, which could exacerbate financial pressures if they cannot pass on higher costs to end users [6][7] - Recent stock performance indicates a significant re-rating, with Amazon shares down approximately 13% and Microsoft shares down 10% from their recent peaks [7] Growth Outlook - While there may still be some potential for growth, it is viewed as limited compared to market expectations, and the value of that growth is considered low [8][9] - The analyst does not foresee a bearish scenario for the near term but also does not maintain a bullish outlook, suggesting that a meaningful reduction in capex and high growth would be necessary for a more optimistic view [9] - The tech sector, particularly stocks related to AI, has faced declines, with the Nasdaq 100 down 6% from its late October high and the Roundhill Magnificent Seven ETF down 7% from its peak [9][10]