Artificial intelligence has been a major driver of the stock market over the past three years.
Concerns about artificial intelligence (AI) stocks and their monster valuations aren’t exactly new, but the market is now less cautious about them. After a big multi-year run for the sector, it appears some investors are setting the bar high for AI stocks. Announcements about increased capital expenditures to build out AI infrastructure are no longer just a driver of stock prices, as investors start to question the sustainability of it all. By Oracle (ORCL +1.97%) Unpleasant Broadcom (AVGO +0.43%)Concerns about AI stocks are starting to mount.
The returns appear less attainable than they may once have been
Concerns about AI stocks have been growing, including high valuations, excessive capital expenditures, and whether the US and the world really have the resources to meet the entire demand for AI, given the need for data centers, the power required to run these data centers, and other necessary resources, such as water to provide the liquid cooling solutions for AI chips.
Image source: Getty Images.
Oracle presented perhaps the best quarterly earnings report of the year in September. The company reported more than $450 billion in remaining performance obligations, thanks to its fast-growing AI cloud services business, which leases data centers with clusters of graphics processing units (GPUs) to companies looking to run AI applications. Oracle has experienced strong demand from hyperscalers such as Microsoft and Open AI. The stock rose 40% after this report.
But stocks have bounced back in recent months. Media outlets reported in November that Oracle would need to raise $38 billion in debt to build the data centers needed to meet demand. The Information also reported that Oracle’s AI data center business, while experiencing intense growth, is delivering a profit margin between 10% and 20%, not as high as investors had hoped.
In Oracle’s most recent earnings report for the fiscal second quarter of 2026 ending Nov. 30, the company’s revenue fell just short of consensus estimates of nearly $16.1 billion, and the stock fell. Oracle also raised its full-year capital expenditure guidance from $35 billion to $50 billion and reported negative free cash flow of $10 billion for the quarter. After the earnings report, the price of five-year credit default swaps on Oracle’s debt, which are essentially insurance that investors can buy to protect against future defaults, hit a record high.
Things didn’t get better for Oracle after chipmaker Broadcom reported earnings for the fourth quarter of its fiscal year 2025 ending Nov. 2. In fact, earnings were strong, with Broadcom reporting numbers above consensus estimates and a solid outlook for the future. However, investors again came away disappointed after Broadcom indicated gross margin would decline next quarter. The market also felt that the company’s AI product backlog was undervalued.
Today’s change
(1.97%)$3.64
Current price
$188.56
Key data points
Market capitalization
$542 billion
Day range
$184.22 -$189.79
Range of 52 weeks
$118.86 -$345.72
Volume
1M
Avg. full
26M
Gross margin
65.40%
Dividend yield
1.01%
The big question has become whether or not the hundreds of billions that major companies have already spent on AI-related investments – and the trillions they are collectively expected to spend in the coming years – make sense from a returns perspective.
According to him, the math doesn’t make sense IBM CEO Arvind Krishna, who said the hyperscalers will see “no way” a return on all this data center spending. Krishna said it currently takes about $80 billion to build a 1 gigawatt data center. “Okay, that’s today’s number. So if you’re going to invest 20 to 30 gigawatts, that’s one company, that’s $1.5 trillion in capital investment,” he said.
Maybe it’s time to slow down
I don’t think investors doubt that AI can change the world, but the path is now murky. There may be limits to the resources required, and deploying all of these resources while taking on debt to do so may not deliver as strong a return as investors initially expected, at least not within the desired timeframe.
As most know, the Internet boom first had to survive the dot-com bubble to reach its current state. Now is a good time for investors to review their AI holdings and carefully examine the valuations and the assumptions on which they are based. If they seem too good to be true, they probably are, and it’s time to think about cutting some profits.
