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Investing.com -- Valuations in artificial intelligence stocks are nearing levels last seen during the dotcom boom, UBS warns, raising questions over sustainability despite record spending by U.S. technology giants.
The bank said that the U.S. tech sector is trading at an aggregate HOLT Economic price-to-earnings (P/E) above 35 times, a level comparable to the post-dotcom peak. HOLT Economic is UBS’s proprietary valuation and performance model.
UBS explained that this indicates a significant portion of the sector’s market value is based on expectations of future cash flows rather than earnings generated today.
That leaves “little room for cash flow disappointments,” said Michel Lerner, head of the HOLT analytical service at UBS, given uncertainties around the return on massive capex outlays, energy constraints for data centers, and rising competition, particularly from China.
AI has become a dominant theme in corporate earnings, with one in four company releases now referencing the technology, according to UBS.
The surge has been accompanied by unprecedented capex and R&D spending, with Meta Platforms (NASDAQ:META), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) together expected to commit $350 billion this year—more than the combined annual capex of the entire listed energy and utilities sectors in the U.S. and Europe.
Lerner notes that Apple (NASDAQ:AAPL), Nvidia (NASDAQ:NVDA), and Broadcom (NASDAQ:AVGO), alongside the hyperscalers, spent more on research and development in 2024 than all listed European equities combined.
Collectively, these companies are set to generate 37% of total U.S. economic profit in 2025, more than six times Europe’s aggregate.
However, "many of the use cases are premised on future, rather than current revenue opportunities," Lerner said, with even the industry leaders sounding caution. UBS cited OpenAI’s CEO Sam Altman, who recently acknowledged that the sector may be in a bubble.
At the same time, a recent MIT study found that 95% of current generative AI pilots are failing to generate immediate revenue growth, underscoring the gap between hype and realization.
Lerner warns that cash flow resilience for Big Tech could come under pressure, with consensus forecasts pointing to declines in Cash Flow Return on Investment (CFROI) for Amazon, Meta, Microsoft and Alphabet over the next two years, a reversal from recent trends.
Moreover, the imbalance between hyperscaler investment and utility providers’ capacity to supply power raises further risks to profitability.
Against this backdrop, the bank suggested investors diversify their exposure, flagging opportunities in non-U.S. quality growth stocks, global names held in secular growth ETFs outside U.S. AI, and sectors such as real estate, utilities, energy, communication services and staples, which historically show the least correlation to U.S. tech performance.