AI Capex: The New Arms Race in Tech?

The global race for AI supremacy is reshaping Big Tech’s investment landscape, with capital expenditure (Capex) emerging as the defining metric of ambition and market leadership. Unlike past cycles where immediate profits drove valuations, today’s market rewards bold vision and scale in AI infrastructure. Companies committing massive resources to AI, including compute power, talent, and R&D, are winning investor favor. Those who hesitate risk falling behind. This dynamic mirrors an arms race, where technological dominance and multi-decade growth are at stake.

Nvidia Sets the Benchmark

Nvidia (NASDAQ:NVDA) has redefined efficiency in the AI ecosystem, generating approximately $4 million in earnings per employee, based on $26.9 billion in Q2 2025 revenue and about 6,700 employees. This level of profitability, fueled by its dominance in GPUs and AI chips, sets a high bar for tech giants like Alphabet, Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN). Investors are now evaluating these firms not only on top-line growth, but also on their ability to replicate Nvidia’s operational leverage through innovation in AI infrastructure.

Market Signals: Spend to Win

The market is sending a clear message: aggressive AI investment is now the cost of leadership. Alphabet’s (NASDAQ:GOOGL) Q2 2025 earnings set the tone, with Capex surging to $22.45 billion for the quarter, up 70 percent year over year. The company raised its full-year Capex forecast to $85 billion, up from $75 billion, to meet demand in AI and cloud infrastructure.

The “Magnificent 7”, Apple (NASDAQ:AAPL), Microsoft, Alphabet, Amazon, Nvidia, Meta (NASDAQ:META), and Tesla (NASDAQ:TSLA), are projected to spend more than $320 billion on Capex in 2025. Amazon leads with over $100 billion, followed by Google at $85 billion, Microsoft at approximately $80 billion, and Meta in the $60 to $65 billion range.

Stocks of aggressive spenders like Alphabet, Meta, and Microsoft have outperformed more conservative names such as Apple, which is facing scrutiny for a slower AI rollout. The underlying assumption is that AI’s potential to transform productivity justifies the upfront investment, with monetization expected over time.

Alphabet: A Value Play in the AI Race

Alphabet stands out as a value opportunity in the midst of this spending cycle. The raised Capex forecast is designed to tackle a $106 billion cloud backlog and protect its AI leadership position. At a forward P/E of 18.88, Alphabet trades below the S&P 500 average, yet delivers stronger growth and tighter execution.

Q2 2025 revenue hit $96.43 billion, up 14 percent year over year, with earnings per share of $2.31 beating consensus estimates of $2.18. Google Cloud posted $13.62 billion in revenue, up 32 percent, with its operating margin nearly doubling to 20.7 percent, driven by AI workloads and Gemini adoption. Gemini now powers AI Overviews for more than 2 billion monthly users across over 200 countries.

Alphabet is allocating roughly two-thirds of its Capex to servers, including its in-house TPUs, and the remaining one-third to data centers and networking. This puts it in direct competition with Microsoft and Amazon, both of which are ramping spending in similar areas. While Alphabet’s Q2 free cash flow declined 61 percent to $5.3 billion due to elevated Capex, trailing 12-month free cash flow remains solid at $66.73 billion. With headcount near 180,000 and cost discipline in place, the investment thesis remains intact. Risks include potential disruption from AI-native search interfaces and growing regulatory pressure from both U.S. antitrust cases and the EU AI Act, but Alphabet’s scale and undervaluation make it a top long-term play.

Microsoft: Cloud and AI Synergy

Microsoft is in a strong position to capitalize on AI infrastructure expansion. Azure continues to lead enterprise cloud adoption, with analysts projecting revenue growth of 30 percent or more in Q2 2025. The company reported $19 billion in Capex in Q1, much of it directed toward data centers, chips, and software to support AI workloads.

Microsoft’s integration of OpenAI models across its ecosystem, including Azure and Microsoft 365 Copilot, is a competitive edge. Trading around 30 times forward earnings, the company commands a premium multiple that reflects its dominance in both enterprise software and AI innovation.

Amazon: Playing the Long Game

Amazon remains one of the best-priced AI stories in the market. While much of the AI narrative has centered around flashy LLMs and consumer-facing applications, Amazon is building quietly and strategically at the foundation.

The key is AWS, still Amazon’s earnings engine and increasingly the core infrastructure behind enterprise AI. From model training to inference and deployment, AWS is where AI workloads live. With proprietary chips like Trainium and Inferentia, and partnerships such as the one with Anthropic, Amazon is going beyond renting compute. It is building defensible scale in AI infrastructure.

But this isn’t just a cloud story. Amazon is embedding AI across its entire ecosystem, including personalized retail, logistics automation, and a rapidly expanding advertising platform. That breadth of application creates operating leverage and long-term resilience.

In Q2 2025, AWS revenue is expected to grow 19 percent, supported by demand for tools like Bedrock and SageMaker. Capex is projected at $100 billion for the year, reflecting broad AI integration across cloud, logistics, and media. Operating margins climbed to 10 percent in Q1, up from 7.3 percent a year earlier.

While the market debates Nvidia’s next quarter, Amazon’s AI advantage is quietly compounding. It may not be grabbing headlines in the same way, but it’s building a moat across multiple verticals. For investors looking for scalable, diversified exposure to AI, Amazon remains a top-tier pick.

The Broader AI Landscape

The Capex wave is not limited to the United States. China’s Tencent (HK:0700) has raised its 2025 Capex to the low teens as a percentage of revenue, moving in step with U.S. megacaps. The ripple effects are beginning to reach mid- and small-cap names in areas like edge computing, AI software, and vertical AI hardware.

Monetization models will vary across the sector. SaaS players may focus on subscriptions, cloud providers on usage-based pricing, and chipmakers on IP licensing. The productivity uplift from AI is estimated to contribute between 1.5 and 3 percent to annual economic growth, adding tailwinds to semiconductor demand and data center development.

IBM’s Pivot Signals Enterprise Demand

Even legacy names are pivoting toward AI. IBM’s (NYSE:IBM) Q2 earnings showed 8 percent growth in consulting, much of it tied to generative AI projects. CEO Arvind (NSE:ARVN) Krishna’s shift in tone, from cautious to optimistic, reflects broader AI adoption among enterprise clients.

Retail Investor Dynamics

Retail participation continues to play a stabilizing role in the market. Since 2020, access to information and trading platforms has improved, allowing retail investors to better navigate volatility. Social media sentiment remains positive toward AI leaders, and retail flows are shortening drawdowns. The VIX has averaged 15 in 2025, down from 20 in 2022, suggesting increased resilience.

Valuation Metrics and Strategic Insights

In this market, the PEG ratio is particularly useful. Alphabet’s PEG of roughly 1.2, based on a 15 percent EPS growth rate, suggests growth is still underpriced. Amazon’s PEG around 1.5 also screens well. I expect P/E expansion in 2026 as AI revenue gains begin showing up in earnings.

Risks to Watch

• Monetization Lag: Companies like Meta and Tesla could face margin pressure if monetization lags

• Search Disruption: AI-native interfaces may reduce traffic and revenue for legacy ad models

• Regulation: The EU AI Act and U.S. antitrust actions could curb expansion or slow development

• Efficient Models: Leaner models like DeepSeek-R1 may challenge infrastructure-heavy strategies

Conclusion

The AI Capex race is real, and it is changing how Big Tech is valued. Alphabet, Microsoft, and Amazon are spending heavily, not because they can afford to, but because they must. Nvidia’s $4 million-per-employee benchmark has shifted expectations, and scale is now seen as strategy.

Alphabet’s value, Microsoft’s integration, and Amazon’s cross-vertical application of AI make all three long-term winners. As monetization catches up with infrastructure, mid- and small-cap names will follow. Retail participation will provide support along the way.

My S&P 500 target of 6,500 by year end and 7,000 by mid-2026 reflects this optimism with a degree of caution. The investment opportunity in AI is clear, but how efficiently that vision translates into earnings will determine the upside.