Shares of Amazon (NASDAQ: AMZN) and Alphabet (NASDAQ: GOOGL) have faced considerable pressure this year amid concerns regarding potential overspending on artificial intelligence (AI) infrastructure. Despite these fears, analysts suggest both companies are well-positioned to capitalize on the growing demand for AI technologies. In a recent note, Nick Jones of BNP Paribas expressed a bullish outlook on both firms, asserting that investor concerns about AI infrastructure spending are “overdone.” He highlighted that data center spending has become a critical issue, particularly as some investors have begun to question its economic viability.
Prominent investor Michael Burry, known for his role in the financial crisis depicted in “The Big Short,” argued last fall that the lifespan of graphics processing units (GPUs) and other AI chips is relatively short, leading to skepticism about whether companies like Alphabet and Amazon will derive significant economic benefit from their heavy investments. However, this concern has not deterred either company from ramping up their capital expenditure (capex) plans for the year.
In February, Alphabet announced it would increase its capex between $175 billion and $185 billion, a significant rise from $91.4 billion in 2025. Shortly thereafter, Amazon disclosed plans to boost its capex to $200 billion from $131.8 billion last year. Despite the ambitious spending announcements, shares for both companies fell, reflecting investor unease over the strategic implications of such investments.
Alphabet and Amazon are major players in the cloud computing sector, alongside Microsoft. Amazon leads the market with its Amazon Web Services (AWS), which pioneered the infrastructure-as-a-service industry in the mid-2000s. AWS remains the company’s most profitable segment and is experiencing rapid growth. Alphabet’s Google Cloud holds the third position in market share, trailing behind Microsoft’s Azure.
Jones emphasized that the backlog-to-capex ratios for both firms indicate they are not overspending and that their current investments are crucial for meeting increasing demand. He noted improvements in efficiency, with revenue per employee metrics on the rise. His price targets are set at $390 for Alphabet, which represents approximately 30% upside potential, and $320 for Amazon, indicating around a 50% gain if achieved.
The growing necessity for AI infrastructure investments is particularly relevant for companies like Alphabet and Amazon, both of which have developed their own application-specific integrated circuits (ASICs) tailored for AI tasks. These custom chips are designed for specific purposes, offering greater energy efficiency and lower total ownership costs, thus providing a structural cost advantage. Alphabet leads in this domain with its tensor processing units (TPUs), which have been integrated into its hardware and software ecosystem for over a decade. Amazon has also developed budget-friendly options, including its Trainium and Inferentia chips, both of which are gaining traction with customers deploying them in their data centers.
Recent partnerships underscore the demand for these proprietary chips. Anthropic, an AI safety and research company, has placed a $21 billion order for TPUs with Alphabet’s partner Broadcom for this year, extending its partnership for additional capacity through Google Cloud. In parallel, Amazon has opened a large data center dedicated to Anthropic, powered by its Trainium chips, indicating a strong commitment to AI infrastructure.
Another factor favoring both Alphabet and Amazon’s heavy investment in AI is their significant internal usage of AI technologies. Both companies have developed large language models (LLMs) and are leveraging AI to enhance various business segments, such as search for Alphabet and e-commerce for Amazon. This internal capacity helps mitigate the risks associated with overbuilding, as both companies can absorb their infrastructure investments more effectively.
With both stocks trading below their previous highs, analysts view this as an opportune moment for investors to consider entering positions in these AI-centric companies. For those evaluating Alphabet, it is essential to note that the Motley Fool Stock Advisor analyst team recently identified ten additional stocks for investment that did not include Alphabet but have shown strong potential for returns.
Geoffrey Seiler, who has positions in Alphabet, Amazon, and Broadcom, underscores the potential of these companies in the current market landscape. As AI continues to evolve, the strategic investments made by these tech giants could redefine their competitive advantages, making them significant players in the future of technology.
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