Microsoft Corp. (MSFT) CEO Satya Nadella said recently, “All I know is, I'm good for my $80 billion” regarding the $500 billion Stargate AI announcement. But a February note from TD Cowen analysts stated that Microsoft was backing out of data center leases. Here’s why AI stock investors shouldn’t be too concerned, writes Ed Yardeni, editor of Yardeni QuickTakes.
Nadella’s comments followed the emergence of DeepSeek's R1 large language model and chatbot, which was supposedly trained at much lower cost than state-of-the-art models built in the US. But TD analysts just reported that Microsoft walked away from two gigawatts’ worth of projects over the last six months after cutting back support for new model training by OpenAI.
Nvidia Corp. (NVDA) fell 5.7% on the news, while the PHLX Semiconductor index dropped 3.3%. The semiconductor sector now has mostly erased its valuation premium versus the rest of the stock market that had built up since ChatGPT’s release on Nov. 30, 2022.
We’ve opined that DeepSeek would be a net positive for AI demand, as cheaper training and model proliferation helps non-tech companies adopt AI and boost productivity. Perhaps there was a mini-bubble built up on AI euphoria.
But since the Magnificent 7 stocks' long-term earnings expectations and valuation multiples already have realigned closer to historical averages without a bear market or recession, we think further downside for the AI trade is limited. Notably, the Defiance Large Cap ex-Mag 7 ETF (XMAG) was down just 0.7% on one day last week, and still up 1.5% on the year.
