Goldman analysts offer history lesson on the AI spending binge
Questions about whether such giant bets can possibly pay off are rising. Should they?
In many ways the DeepSeek freak-out on Monday was a mini crisis of confidence related to the vast sums American tech giants are pouring into building out their AI fiefdoms.
As Rani Molla has noted recently, Google, Meta, Microsoft, and Amazon alone could spend more than $250 billion on capex this year.
Even if there is some mystery surrounding the true cost of DeepSeek’s model, the arrival of a low-cost Chinese AI option quite rightly prompted some questions about whether such giant bets can possibly pay off.
In a recent note, Goldman Sachs market analysts offered some context:
“History provides some useful lessons. First, the original capex spenders on revolutionary technology are not always the biggest beneficiaries; the experience of the Telecom companies in the late 1990s is a good example.
Second, even very dominant companies eventually succumb to competition — often from new companies in the same sector — just as AMD and Intel experienced, for example, with the ascent of Nvidia. The extent to which these observations are relevant to the current market setup is still not clear.
But the news around DeepSeek has been a wake up call that has shaken the confidence that was reflected in market pricing. Indeed, our technology analysts argue ‘DeepSeek has introduced pricing competition into the foundational model layer at a point in time where models are just about good enough for many enterprise use cases’. The revelation of a cheaper competitor entering the AI space has exposed the risk of concentration.”
Concentration, or the share of overall market value crammed into the market capitalization of the largest stocks, has been extraordinarily high in the US in recent years as the Magnificent 7 have romped.
Of course, the heroic ability of these megacap tech companies to offset one another’s losses with gains, with investors seemingly dumping one to buy another, has kept this vulnerability from being realized, like when Nvidia cratered on the DeepSeek news but its peers didn’t, preventing a broader market crisis.
“The concentration of equities as an asset class that has left equity investors vulnerable to disappointments,” Goldman analysts wrote.
