Nervousness Among AI Investors
A lingering sense of nervousness remains among AI investors, particularly regarding the competitive dynamics between US and Chinese AI developers. A significant concern centers on whether low-cost models from Chinese firms threaten to usurp US competitors, which have higher sunk investment costs.
Recent trading has shown the Magnificent 7 in the US experiencing a 1.4% daily gain on Friday, while leaders in the Chinese AI sector have suffered declines of 8% to 10% from their recent highs, largely attributed to fewer positive earnings surprises.
Favoring US AI Companies
Despite both countries making significant strides in AI, there are compelling reasons to favor US AI companies over their Chinese counterparts, especially regarding upcoming investments. Key factors influencing this bias include capital expenditure trends, research and development spending, and monetization potential.
Capital Expenditure Trends
Capital expenditure (capex) is a crucial metric for evaluating growth potential within AI firms. It gauges funds allocated to acquire and maintain assets essential for AI advancements, particularly in training large language models (LLMs).
The US Big 4—Amazon, Alphabet, Microsoft, and Meta—are anticipated to spend USD 224 billion on capex in 2024, rising to USD 302 billion in 2025. In contrast, China’s counterparts are projected to increase their capex from USD 33 billion to USD 51 billion within the same timeframe. Thus, while China’s growth rate may be higher (54%), the absolute spending in the US remains nearly six times greater, offering a clear scale advantage.
Research and Development
Research and development spending is another critical driver of innovation within the AI sector. The top three US cloud platforms are expected to invest a combined USD 180 billion in R&D by 2025, vastly outpacing the USD 35 billion projected for China’s top platforms. R&D intensity, an indicator of investment efficiency, is also higher in the US at 13.5%, compared to China’s 8%.
Monetization Strategies
The monetization potential of AI solutions is another significant factor favoring US firms. The major US cloud platforms are projected to generate 12 times more cloud revenue than their Chinese counterparts, despite investing 6-8 times more in AI capex. This disparity illustrates the superior monetization strategies of US firms.
American companies benefit from first-mover advantages, stronger pricing power, and a larger market, which translates to a higher likelihood of quick payback on investments compared to their Chinese competitors.
Investment Opportunities
For investors looking to capitalize on the ongoing capex boom in AI, targeting the leading AI compute names in the US market appears to be a sound strategy. With substantial growth projected for capex and AI compute spending, tools for managing investment volatility and providing opportunities to buy on dips may prove beneficial.
The combination of high technical capabilities, innovation focus, and scalable business models makes US AI investments an attractive proposition in the current landscape.
Conclusion
The valuation outlook for US cloud platforms remains appealing, reinforcing the belief that they are well-positioned for long-term growth in the AI sector. As the competition continues to unfold, investors may find it wise to focus their attention on the opportunities emerging from these leading companies.
