AI hyperscalers face bear case

What happened: AI hyperscalers, once darlings of the market, are now facing a bear case. A Bain study revealed that AI investments aren't paying off as expected. Meanwhile, the AI infrastructure demand is strong, but the business case is weakening. Nvidia (NVDA) and Broadcom (AVGO), key AI suppliers, saw their stocks double in a year, but their pure exposure to AI leaves them vulnerable to any slowdown in hyperscaler capex.

Market impact: This narrative is driving a re-evaluation of AI stocks, particularly those heavily exposed to hyperscalers like NVDA and AVGO. The tech sector, and AI sub-sector specifically, may see a valuation repricing. Investors are reassessing the business case for AI, which could lead to a shift in capital allocation away from AI-focused companies.

What to watch next: In Q1 2023, keep an eye on NVDA's gross margin (reported March 15) and AVGO's EBITDA margin (reported February 22). A simultaneous compression in these metrics would signal a slowdown in AI pricing, potentially triggering further sell-offs in AI stocks. Additionally, watch for any updates on hyperscaler capex plans, as a slowdown could exacerbate the bear case for AI hyperscalers.