Wall Street's enthusiasm for artificial intelligence titans is waning, prompting some U.S. investors to shift focus to infrastructure companies. These firms are expected to profit from substantial AI capital expenditures.
Following significant gains, shares of AI leaders like Alphabet and Amazon have seen sharp declines. Investors now question whether the immense investment in AI systems will justify current high valuations. The strategy is to invest in companies receiving direct AI spending, including chipmakers, data center constructors, and utility providers.
Stocks such as Caterpillar, Lumentum, and Western Digital have reported double-digit gains this year. In contrast, the S&P 500 has seen modest returns, and the Roundhill Magnificent 7 ETF, tracking AI hyperscalers, has incurred losses.
This performance is driving exchange-traded fund providers like BlackRock and VistaShares to launch new products focused on AI infrastructure. VistaShares' Artificial Intelligence Supercycle ETF, launched in December 2024, has delivered substantial returns, with a significant portion allocated to chipmakers supplying data centers.
BlackRock's iShares A.I. Innovation and Tech Active ETF has increased its investment in AI infrastructure plays, from chipmakers to power companies. Jay Jacobs, BlackRock's U.S. head of equity ETFs, noted that these areas currently represent the primary revenue streams.
New infrastructure ETFs have recently launched, with some concentrating on electrification to support AI data centers. Robert Becker, chief investment strategist at Harrison Street, highlighted the critical need for reliable power sources for AI infrastructure.
While major AI companies continue to generate strong revenues, investors point out this is largely from their core businesses funding AI capital expenditures, estimated to reach $630 billion this year alone.
Some investors are exploring niche market segments for underpriced infrastructure companies. Companies providing energy for semiconductor fabrication plants and data centers are gaining attention. Quanta Services, a provider of construction and maintenance for electric utilities, has seen significant stock appreciation.
Other companies, like Modine Manufacturing, are pivoting to provide data center cooling systems, also experiencing stock growth.
Despite the trend, some analysts caution investors. Citing the dot-com bubble's impact on fiber optic network companies, they warn that while AI buildout spending comes from financially robust companies, valuations for AI-exposed assets may be becoming overly ambitious. Caution is advised as the market navigates this evolving investment landscape.