(Investor's Business Daily) - Artificial intelligence may be a cash cow for Nvidia (NVDA) but other tech companies will still be under the gun to show huge investments will pay back, says JPMorgan in report amid worries over an AI bubble. AI stocks initially rose then reversed down on Thursday after Nvidia released earnings.
The JPMorgan report noted escalating investor concerns fueling an AI bubble, including some tech companies adding massive debt to fund data center infrastructure buildouts. A team of JPMorgan analysts contributed to the report.
"Despite fears of an AI bubble, we believe that the equity and credit markets will continue to support this story for now," Nathaniel Rosenbaum, a JPMorgan U.S. high grade credit strategist, said in the report.
AI Stocks: $5 Trillion Price Tag?
Nvidia stock initially rose, then fell. It was down nearly 2% to near 183 on the stock market today. Other AI stocks reversing down were Broadcom (AVGO) and Palantir Technologies (PLTR). Nvidia's data center revenue topped $50 billion for the first time.
In JPMorgan's view, tech companies are racing to scale up AI and betting that data center capacity will be key to dominating in the future.
"Building out global data center and AI infrastructure and related power supplies could cost over $5 trillion," said Tarek Hamid, head of North American corporate credit research.
"Funding that extraordinary growth will likely require participation from every public capital market as well as private credit, alternative capital providers and even government involvement," Hamid added.
What's Driving AI Bubble Worries
Other investor concerns over an AI bubble include the securitization of loans to data center infrastructure builders as well as the growing "circularity" in the AI ecosystem, which blends investments with commercial relationships.
Another worry is that costly AI data center infrastructure depreciates over time from an accounting point of view.
The JPMorgan report warned that if "AI growth expectations significantly disappoint," it could spark a market rotation out of tech stocks.
But highly profitable tech companies that churn out huge free cash flow could ease worries over balance sheets amid debt-funded capital spending.
"Overall, tech companies have margins whereas other cyclical asset-intensive companies (energy and industrials) do not," said Bhupinder Singh, U.S. equity strategist.
AI Stocks: Monetization Key
But some tech giants may be better positioned than others.
"Twelve to 18 months ago, the hyperscalers — Amazon.com (AMZN), Microsoft (MSFT), and Alphabet's (GOOGL) Google — were highly credit rated, with very low leverage and minimal debt outstanding," said Rosenbaum. "Now, Oracle (ORCL) is currently the largest nonfinancial issuer in the market, with just under $100 billion in debt. By the end of this month, Meta Platforms (META) likely will be the 16th largest issuer, having doubled its debt in less than a month."
Aside from Nvidia, cloud computing giants have the means to grow revenue from AI investments, said the report. But the jury is still out on many tech companies.
"We are interested to see which platforms are able to translate unprecedented capital intensity into recurring, defensible AI revenue streams once the infrastructure phase gives way to software monetization," added Rosenbaum.
By Reinhardt Krause
