Charles Jones

As a follow up to our piece “The Arithmetic of the AI Capex Boom", we have been working to understand if there are other factors which are supporting AI infrastructure share prices which may be more transient in nature. In the course of this work, we identified three factors which may be supporting current earnings and investor optimism, but which may not repeat going forward.

We have asked ourselves two connected questions and used simple “back of the envelope” calculations to test our position: 1) What would hyperscalers (and Oracle) need to charge for AI to earn a 15% return on the capex of the last three years and the next three years? 2) What portion of the labour force needs to be replaced to sustain current AI expectations?

As part of results announcements in the last fortnight, the four dominant US ‘hyperscalers’ (Microsoft, Alphabet, Meta, and Amazon) have entered the largest capital spending cycle in the history of technology with a collective capex plan of ~$650 billion for 2026! Individually, each management team can justify its spending. Collectively, however, these spending trajectories resemble something very close to a Prisoner’s Dilemma.