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J Studios
Management commentary during earnings season indicated strength in the AI spending cycle, but there are concerns about what that means for margins, according to Goldman Sachs.
“While investors have rewarded firms investing in AI, client concerns about potential returns on investments suggest investors will continue to scrutinize a firm’s AI strategy and remain focused on profitability,” strategist David Kostin wrote. “A cross-sectional regression of Russell 3000 (NYSEARCA:IWV) stocks shows that investors today are paying more for margins than for sales growth.”
“Following a quarterly low of $14 billion in 1Q, (AMZN) plans a large step-up in 2024 capex to support AI workloads and capabilities in AWS. (META) raised its capex budget to support AI initiatives ($35-$40 billion vs. $30 $37 billion prior). (GOOGL) expects quarterly capex to remain at or above 1Q levels of $12 billion to drive AI innovations in advertising,” Kostin said.
“Consensus 2024 and 2025 capex estimates for TMT stocks have increased YTD by 6.5% and 9%, respectively. In comparison, analysts have lifted estimates for capex by non-TMT stocks by just 1.6% and 3.6%.”
“In a reversal from the last two years, our sector-neutral basket of companies spending the most of capex and R&D has outperformed our basket of stocks with the highest total cash return by 5 pp YTD (10% vs. 5%),” Kostin noted.