AI boom not shock-proof; chip shortage and weak pass-through weigh: Report
New Delhi, July 3
While the AI boom is supported by strong cash flows, it is not immune to shocks, with chip shortages posing a major risk to the rally, says Nuvama Institutional Equities.
As per the brokerage house, supply shock or a sharp rise in US Federal Reserve interest rates could trigger a turning point in the AI boom, as rising chip costs and stretched valuations expose early signs of excess in the rally.
It noted, higher hardware prices are inflating hyperscalers' capex and squeezing cash flows at a time when monetisation of AI remains limited, potentially forcing a reassessment of investment plans as investor pressure builds.
Additionally, the surge in AI capex and global hardware stocks already shows clear signs of excess, including high valuations (around 10x P/B versus 2-4x in the pre-AI era), a sharp rise in hardware tech stocks even as hyperscalers stagnate, retail euphoria similar to past market peaks in 2000, 2007, and 2021, and a renewed IPO boom.
"A turning point in the AI boom could be triggered by a supply shock or a sharp rise in US Federal Reserve interest rates," it said.
It noted that a chip shortage, with prices up about 2.5x year-on-year, poses a major risk to the AI boom "as it will further inflate the already high capex bill of hyperscalers when scope for pass-through is limited."
The report said that the technology is still in its early stages of adoption and that global growth, excluding AI, remains weak. It noted that this "will erode hyperscalers' FCF and invoke shareholder dissent (early signs visible)," especially at a time when the US Federal Reserve remains hawkish and focused on price stability and its 2 per cent inflation target.
Semiconductor prices have more than doubled in the past year amid the AI boom, but passing these costs on to end users remains difficult, it noted.
The vulnerability is further heightened as non-AI growth remains weak in the US and globally. Additionally, key risks to the timing of AI mania rolling over emanates from a further supplyside easing in oil and other commodity prices.
"However, we firmly believe that it is post a bust in the capex mania that AI adoption will explode as costs drop dramatically. This is how it has played out in the internet era and we believe this time will be no different," it said.
— ANI
Reader Comments
I work in the IT sector in Bangalore. The AI hype is real but so is the cost pressure. Our company is struggling to pass on GPU costs to clients while management wants more AI projects. This report hits the nail on the head about investor pressure building up.
The comparison with the internet era is apt. After the dot-com bust, we got Google, Amazon, and Facebook. Similarly, after this AI capex frenzy cools down, we'll see proper adoption. India needs to be ready with skilled talent when that happens. 🇮🇳
Respectfully, I disagree. The hyperscalers have deep pockets and AI is still in early innings. Chip prices may be up 2.5x, but that's because demand is exploding. This feels like the typical 'this time it's different' bear case that gets proven wrong. Just my two paise.
As a startup founder working on AI applications, I can confirm the pain. We booked GPU capacity six months ago and prices have doubled since. Small players like us will get squeezed first. India needs to develop cheaper alternatives or we'll get left behind. 😞
The retail euphoria point is spot on. I've seen colleagues and relatives putting money into AI-themed mutual funds without understanding the underlying risks. When the Fed finally blinks or chip supply normalizes, many will get burned. History doesn't repeat but it rhymes.
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