Prominent tech investor Dan Niles indicated that he is scaling back his investments in hyperscalers and chip stocks.
Niles, the founder of Niles Investment Management, said on CNBC’s ” Squawk on the Street ” on Monday that he is retreating from “Magnificent Seven” companies due to concerns over hefty AI infrastructure expenses. He anticipates these costs could potentially affect the return on investment for these entities.
Despite recent gains in chip stocks, Niles is reducing his exposure, predicting a potential “speed bump” in the near future due to these concerns.
“But even there, with the stocks doubling, I’m just going ahead and trimming back some of that exposure.”
As AI costs climb, companies are shifting from maximizing token usage to minimizing it, seeking greater efficiency and lower-cost models. The trend has sparked concerns that reduced AI consumption could pressure revenues for hyperscalers that have invested billions in expanding AI infrastructure.
“If you’re routing things to cheaper models, well, what are your September guidance look like?” asked Niles.
Who Wins The AI Monetization Race?
The tech sector has seen a shift towards a more critical examination of corporate balance sheets. Gina Martin Adams, chief market strategist at HB Wealth, said Wall Street is increasingly distinguishing between Magnificent 7 companies that are successfully monetizing AI and those riding market hype. She called Alphabet Inc.‘s (NASDAQ:GOOG) (NASDAQ:GOOGL) Google and Amazon.com Inc. (NASDAQ:AMZN) as the ‘winners’ in the MAG7 group
She noted that declining free cash flow yields and rising capital expenditures are prompting investors to scrutinize valuations more closely and demand proof that AI investments will translate into sustainable earnings growth.
Furthermore, the current AI-driven semiconductor rally has surpassed the scale of the 1999 dot-com bubble, causing concerns over a sharp divergence in the broader market. Fundstrat’s Tom Lee warned that the AI-driven stock rally could face an abrupt reversal, citing four risks: a Federal Reserve policy overhaul, capital being diverted to major IPOs and equity offerings, supply-chain disruptions linked to the Strait of Hormuz, and extreme investor speculation fueled by record margin debt.
On Monday, most Magnificent Seven stocks declined, led by a more than 5.08% and 4.75% drop in Alphabet and Amazon, respectively, while semiconductor stocks continued to climb, with Micron Technology Inc. (NASDAQ:MU) gaining 6.82%.
Price Action: On a year-to-date basis, the Technology Select Sector SPDR Fund (NYSE:XLK), which tracks the technology sector of the S&P 500, surged 33.16%, while VanEck Semiconductor ETF (NASDAQ:SMH) climbed 79.19%, as per data from Benzinga Pro.
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