Tech giants investing billions in AI are risking future stock performance, says Morningstar.
High capital expenditure may hurt stock returns as it increases competition and supply.
Alphabet, Microsoft, and Amazon’s spending in particular has cut into cash flows.
AI hyperscalers like Amazon, Microsoft, Alphabet, and Meta have invested billions in developing the technology and plan to spend even more — but history has a warning for their stock price.
Tech giants are locked in an AI arms race, but their spending spree has potentially negative implications for their stock, a recent analysis from Morningstar shows.
Data from the last 60 years shows stocks in the top 20% in capital expenditure relative to current sales have subsequently underformed relative to every other capex quintile.
Philip Straehl, chief investment officer at Morningstar Wealth, told Business Insider this week that this is likely because the spending makes the technology more widely available, increasing competition for the big spenders.
Higher capex “generally increases supply,” Straehl said. “It’s more difficult to monetize on those investments.”
Spending has been in the hundreds of billions of dollars so far for the four Big Tech firms mentioned above, and they’re expected to spend $364 billion on AI development in 2025 alone.
Since 2024, spending has started to cut into the free cash flow of Alphabet, Microsoft, and Amazon.
Investors seem to be shrugging this off for now, but Straehl said the huge amounts of spending should start to matter down the line.
“The core businesses of these companies are still doing well,” he said. “But I think what’s going to matter in the future is the ability to monetize generative AI.”
Bob Doll, the chief investment officer at Crossmarket Global Investments, told Business Insider that he agrees with Straehl’s analysis. With the market highly valued amid an uncertain macroeconomic backdrop, he’s emphasizing the free cash flow factor in his portfolio.
“Companies that substantially increase their capex usually lag for a while, until the capex is spent and you can start to see what’s the return on that capex,” Doll said. “So I share that concern.”
In terms of how Straehl is approaching this market, he said he’s taking playing it safe with investor sentiment and market valuations historically high.
“A core tenet of our investment philosophy is that the price paid for a given cash flow should be the primary driver of investment decisions,” Straehl wrote in the August 19 analysis, adding: “We are once again reducing risk and are content to remain on the sidelines, awaiting more attractive opportunities.”
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