High artificial intelligence (AI) capital expenditures are a main reason why the AI trade has been in such a rough spot in the past couple of months. Indeed, much of the Magnificent Seven has been in the red, with some of the bluest blue chips within the cohort now deep enough in the red to be in a bear market.
Of course, it’s way too early in the game to deem the Magnificent Seven as done. But, for the time being, the considerable pressures they’re feeling, I think, may be overdone, especially for the long-term investor who will be around long enough (let’s say the next three to five years) long enough for big AI bets to lead to something, preferably a nice top- and bottom-line boost.
Of course, the future is impossible to predict, as will be how the 2023-25 run-up in technology stocks will be “corrected.” That is, if it’s even in need of a correction, if next-generation AI technologies really do manage to pass that high bar set in front of them. Personally, I think the hundreds of billions thrown at AI efforts represent more of a risk for the swing traders than the true long-term investor. At the end of the day, you can always cut back on spending for next year if the rewards fall short of expectations.
Source: Getty Images
AI CapEx is a concern, but things could turn
Either way, it’s this optionality in the future with regard to AI-related capital expenditures (CapEx) that leads me to believe that the high spending fears of investors are not as warranted. Of course, if you’re not committed to the names for more than two or three years, perhaps the current spend-heavy environment is quite risky, even after the recent markdown in some of the mega-cap tech titans. Either way, this piece will look at three stocks that fit the bill as great bets, as the “overdone” CapEx-driven share price plunge looks to exhaust.
In six months from now, could it be that high AI spend actually leads to a rally rather than a retreat? In my view, all it takes is one or perhaps two monster AI applications or more details regarding the profitability pathway for such a 180-degree turn.
Of course, there’s always the risk that such a turning point never happens or happens more than a year or two down the road. That’s why a long-term horizon is an advantage, in my view, for making the most of this AI boom.
Meta Platforms
Meta Platforms (NASDAQ: META) is one of the spend-heavy Mag Seven firms, but one of my favourites for playing a reversal at some point in the future. The stock is oversold and is going for an absurdly low multiple of around 19.8 times forward price to earnings (P/E). For such an AI titan, a P/E in the teens just doesn’t make a lot of sense, in my view, even if CapEx worries weigh for a while longer.
To put it simply, Meta is a monetization king when it comes to cutting-edge frontier technologies, and AI will be no different. While I’d just buy up Meta shares right here, even at the subar CAD-to-USD exchange rate, I think that the best way to capitalize on the AI spending surge is to simply own the Mag Seven group or perhaps the tech-heavy Invesco Nasdaq 100 Index ETF (TSX: QQC), which is the Canadian version of the famous QQQ group while it’s down.
