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Investing.com -- The Nasdaq suffered its worst week since April, dropping 3% as mega-cap tech and AI-linked stocks led declines. But according to Sevens Report Research, “nothing new” has gone wrong with the AI story.
Investors are simply being forced to confront the gap between AI spending and returns, the Sevens report stated.
Sevens said the pullback reflects “the biggest concern about the AI boom, namely the tectonic gap between the amount of money being spent to build out AI capacity…and the paltry amount of revenue that AI is generating.”
The firm believes that concern was underscored last week when Apple agreed to pay Google only $1 billion to use its Gemini model in a new AI-powered Siri.
“AI bulls would have hoped Apple would have needed to pay more,” Sevens wrote, adding that it reinforces the view that “AI [is] not really being ‘worth’ that much to the end user.”
Other headlines added to investor unease. Oracle’s “enormous spending plans on AI data centers” may result in negative cash flow, while Meta’s post-earnings decline reflected worries it could be “backing the wrong horse” again, similar to its metaverse losses.
Context is key, Sevens noted. “Without AI enthusiasm, the YTD rally would be much, much smaller,” and without AI-linked capital spending, “economic growth would be demonstrably slower.”
With the S&P 500 trading at a near “perfect scenario” valuation, further doubts about AI’s payoff could weigh on broader markets.
Still, Sevens said the weakness is a “sobering moment” rather than a collapse. “Nothing has occurred that makes us think the entire AI-driven rally is suddenly at stake,” the firm concluded.