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Investing.com -- Rothschild has taken a more cautious stance on the hyperscalers, cutting Microsoft and Amazon to Neutral as it argues the economics of the GenAI build-out no longer justify the sector’s premium valuations.
“It is time to take a more cautious stance on the hyperscalers and move beyond the industry’s reassuring ‘trust us – GenAI is just like early cloud 1.0’ narrative, which looks increasingly misplaced,” analyst Alex Haissl wrote in a Tuesday note.
Rather, Haissl argues that the capital going into Gen-AI is far heavier, the returns far thinner, and the margin for error significantly smaller than the market assumes.
“GPU deployments require roughly six times more capital to generate the same cloud 1.0 value, with risks skewed to the downside,” he continued.
Haissl notes that each dollar invested in GenAI infrastructure produces only about twenty cents of net present value (NPV), compared with roughly $1.4 for mature cloud 1.0 projects.
For Microsoft, the analyst argues that the once-powerful AI shield is fading as Azure’s growth becomes increasingly tied to lower-value workloads. Growth remains strong in absolute terms, but its quality is eroding.
Unlike cloud 1.0, where hyperscalers captured much of the software-layer economics, Haissl says that in Gen-AI “value increasingly flows to model providers like Anthropic or OpenAI,” reducing the leverage Microsoft historically enjoyed.
He also highlights the risk of value leakage inside the Office 365 suite as AI features embed more cost than monetization potential.
Amazon faces similar pressures. While Amazon Web Services (AWS) benefits from greater vertical integration and custom silicon, Haissl believes the broader challenge is structural.
He notes GenAI has become the industry’s “low value growth engine,” contributing more than half of AWS’s and Azure’s revenue growth but only through heavy and prolonged capex.
The real constraint, he emphasized, is not operating margins but “the capex required relative to the growth delivered,” with GenAI-driven spending running at ratios that would not have occurred without the AI wave.
Haissl stresses this is not a bear call. He notes that growth over the next year should remain solid as new capacity comes online. But with that growth now largely priced in, Rothschild no longer sees a clear bull case either.
“We no longer see a credible path back to cloud 1.0 economics. The market, however, still prices in that outcome, implying returns we believe are no longer achievable – and this misalignment underpins our more cautious stance,” the note states.
Rothschild trimmed its Microsoft target price to $500 from $560, while keeping its Amazon price objective unchanged at $250.