Is the AI Infrastructure Build-Out a Bubble? Here's What the Data Actually Shows.
Key Points
While there are some similarities to past bubbles, they are many differences with AI stocks.
The hyperscalers could be the best way to play AI from both an offensive and defensive positioning.
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There is a lot of debate about whether the artificial intelligence (AI) infrastructure build-out is a bubble. The amount of money being spent building out AI data centers is astronomical, with the four largest hyperscalers -- Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), and Meta Platforms (NASDAQ: META) -- alone set to spend more than $700 billion this year. That's more than the gross domestic product (GDP) of all but two dozen countries last year.
Meanwhile, AI spending as a percentage of global GDP is nearing bubble levels of past cycles. Goldman Sachs projects total AI capital expenditures at around $765 billion in 2026, while U.S. GDP is expected to be around $32.4 trillion. That would be 2.4% of U.S. GDP, which is above levels seen in past innovation cycles, such as the dot-com bubble.
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However, we are in a much more global interconnected economy today than 25 years ago, and from that perspective, AI spending is only about 0.6% of the 2026 projected global GDP of $126 trillion. While the big hyperscalers are U.S. companies, they have global operations and are building AI data centers worldwide.
Valuations look reasonable
From a stock valuation perspective, meanwhile, the market looks very different from the dot-com era. At that time, hardware companies like Cisco and Sun Microsystems traded at huge forward price-to-earnings (P/E) multiples, with Cisco topping 100x at its peak in 2000.
Nvidia (NASDAQ: NVDA), on the other hand, trades at a modest forward P/E of 23.5 times fiscal 2027 (ending January 2027) analyst earnings estimates. Meanwhile, memory company Micron Technology (NASDAQ: MU) trades at a multiple of just 6.5 times fiscal 2027 analyst estimates, as investors are cognizant of memory cycles and show restraint, not being irrationally enthusiastic.
There are some outliers. Space Exploration Technologies (NASDAQ: SPCX) IPO'd to a huge valuation, but it is more of an outlier than the rule. Elon Musk's companies, like Tesla (NASDAQ: TSLA), have always gotten the benefit of the doubt and commanded high premiums.
Palantir (NASDAQ: PLTR) also has a frothy valuation, trading at a forward price-to-sales (P/S) ratio of 42 times; however, most software-as-a-service (SaaS) stocks have actually traded at dramatically lower multiples. That's much different from the dot-com boom, when seemingly all internet stocks were on a tear, even those with questionable business models.
Image source: Getty Images.
Meanwhile, the hyperscalers doing the bulk of this spending are among the best companies on the planet. They have other strong core businesses that generate significant operating cash flow, helping pay for much of their AI infrastructure spending.
And if you are worried about the potential of an AI bubble but still want to participate in the AI upside, the hyperscalers are the perfect stocks for this. They all have strong core businesses that are benefiting from AI, and either they make money from their spending, helping lift their stocks, or they stop spending and start generating a lot of free cash flow.
It's a win-win type of situation, and that's why Amazon, Alphabet, and Meta Platforms are three of my favorite stocks to own right now.
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Geoffrey Seiler has positions in Alphabet, Amazon, and Meta Platforms. The Motley Fool has positions in and recommends Alphabet, Amazon, Cisco Systems, Goldman Sachs Group, Meta Platforms, Micron Technology, Microsoft, Nvidia, Palantir Technologies, and Tesla. The Motley Fool has a disclosure policy.
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