AI bull market’s internal cracks widen! Analysts recommend: Stay away from “bleeding” tech giants, buy chip stocks

According to Zhitong Finance APP, as US tech giants collectively experienced a pullback, Ben Reitzes, Head of Technology Research at Melius Research, advised investors to avoid hyperscale cloud service providers such as Alphabet (GOOG.US, GOOGL.US), Meta (META.US), and Amazon (AMZN.US), claiming these companies have failed to generate significant cash flow. In a recent interview, he stated: “I still don’t favor hyperscale data center operators. The reason is simple: they can’t generate truly valuable cash flow. Who cares? Buy chip companies instead.”

On Thursday, the US technology sector was hit by a wave of sell-offs, with the collective market cap of the “Magnificent Seven” dropping nearly $800 billion in a single day and the Nasdaq 100 Index falling by 1.9%. Alphabet, Google’s parent company, fell 7% and Tesla plummeted about 15%, both marking their worst single-day performances in over a year. These two companies had just released their earnings reports, and massive capital expenditures sparked market concerns, while negative free cash flow faced close investor scrutiny. However, chip stocks such as Micron Technology (MU.US) rose against the trend.

Reitzes believes that investors should pay less attention to the continuously rising capital expenditures and focus more on the profit margin pressures brought about by these investments.

He noted: “The increase in capital expenditures basically met expectations. I think this is positive news for the chip industry.”

Reitzes explained that Alphabet’s recent margin weakness directly stems from cloud computing costs, data center expansion, and accelerated capital expenditures.

He warned that the “profit margin story” for hyperscale data center operators was just beginning and would soon impact Meta, Amazon, and Microsoft (MSFT.US) as they are set to release their earnings as well.

Despite investor anxiety and falling share prices among tech giants, Reitzes believes these companies will continue to invest heavily in AI infrastructure. He pointed out that the risks facing these companies are now too great for them to pull back.

Reitzes emphasized that Meta is the hyperscale data center operator he monitors most closely and expressed concern over the company’s constantly evolving AI strategy.

Reitzes remarked: “Their strategy seems to change every day, or is completely unknown.” He hopes these companies can quickly transform their massive capital investments into clear and tangible revenue.

Rift Widens Within the AI Bull Market: Chip Stocks Up, Cloud Giants Down

So far this year, the AI sector has presented an extreme case of structural divergence: chip “pick-and-shovel” providers with core production capacity and key supply to the industry have delivered strong performance, while the technology giants investing heavily in computing power and AI infrastructure — the “shovel users” — have faced selloffs. Year to date, the Roundhill Magnificent Seven ETF (MAGS), which tracks the seven US giants, has fallen by 4%, while the Philadelphia Semiconductor Index (SOX) has surged 74% over the same period.

The divergence within AI-themed stocks has garnered attention. JPMorgan strategists warn that the current landscape of “strong chips, weak cloud giants” is highly reminiscent of the late stages of the internet bubble in the 1990s.

JPMorgan strategist Jason Hunter wrote in a report on Wednesday that if hyperscale cloud giants fail to break key technical resistance, while the semiconductor sector continues to hover below critical resistance levels, “what started as sector rotation within the AI theme could evolve into a much more worrisome widespread breakdown.”