After the AI trade suffered a selloff, Ackman threw his support behind the growth potential of cloud computing giants: Wall Street overestimates AI infrastructure costs and underestimates the AI profitability curve.

Title context: After the AI trade suffered a selloff, Ackman threw his support behind the growth potential of cloud computing giants: Wall Street overestimates AI infrastructure costs and underestimates the AI profitability curve. Text: As investors reassessed the possibility that AI-related infrastructure investment may fail to recover its comprehensive costs and AI-driven economic growth expectations, the Nasdaq 100 Index, known as the "global tech stock barometer," saw its total market capitalization evaporate by more than US$2 trillion last month. Amid the global tech stock rout, the latest shareholder letter from Pershing Square Inc. (PS.US), founded and personally helmed by billionaire and hedge fund legend Bill Ackman, shows that Wall Street hedge funds appear to be overly focused on the rising cost of building AI computing power infrastructure and the associated AI financing costs, while significantly underestimating the long-term growth potential of large technology companies that are investing heavily in artificial intelligence. It is understood that Ackman's latest view is basically consistent with those of Wall Street strategists who have shifted to a buy-the-dip stance amid the recent tech stock rout. For example, Gerry Fowler, chief European equity strategist and head of derivatives at UBS Group AG, said in an interview on Monday that the market is underestimating the AI super-cycle, with a return inflection point possibly arriving in 2027; in the strategist's view, after the recent pullback in the AI trade, valuations of hyperscale cloud computing service providers look attractive, because the AI super-cycle reflected in the market's latest pessimistic pricing appears shorter than it may actually last. Deutsche Bank Aktiengesellschaft has shifted back to a bullish theme on U.S. technology stocks, focusing on adjusted prices; Mike Wilson, chief equity strategist at Morgan Stanley, continues to favor a rebound after risk release, focusing on the overpricing and digestion path of AI financing cost pressure, midterm elections and liquidity pressure. Another Wall Street financial giant, Goldman Sachs Group, Inc., bases its "seven repair signals" mainly on signals from the S&P 500, Nasdaq 100, U.S. equity options, and hedge fund positioning and fund flows in the U.S. market, focusing on the long-term bullish narrative for U.S. tech stocks and AI-related stocks. The latest equity market research report released by Deutsche Bank Aktiengesellschaft shows that the institution suddenly turned bullish on U.S. tech stocks, completely overturning its cautious decision three weeks earlier to downgrade the entire U.S. tech sector to "Neutral." The institution's strategist team said the sharp selloff has created attractive buying opportunities, and a considerable portion of AI-related risks has already been reflected in prices. Deutsche Bank strategists said the relative performance of tech stocks has fallen to the bottom of its long-term range, a level that in recent years has marked attractive entry points. Deutsche Bank's proprietary statistical data show that in previous instances when funds rotated back into tech stocks, the sector rose by an average of about 32%, outperforming the rest of the S&P 500 constituents by about 30 percentage points. Although long-term earnings growth expectations for the U.S. tech sector remain solid, overall equity positioning is still relatively light; Deutsche Bank's strategist team said that if the profits of these AI-related tech companies remain resilient, investors still have ample room to increase exposure. Deutsche Bank strategists therefore upgraded U.S. tech stocks and global tech stocks from "Neutral" to "Overweight," their most optimistic long-term bullish rating. Bill Ackman: Wall Street is "punishing hyperscalers" for construction costs while ignoring their growth potential In its shareholder letter, Bill Ackman's Pershing Square said Wall Street hedge funds are underestimating the long-term potential of large technology companies investing heavily in artificial intelligence, focusing too much on rising infrastructure costs while ignoring future revenue growth, stronger cash flow and return on investment. The investment firm also sees opportunities in the broader stock market. Before Tuesday arrived, Pershing Square shares rose more than 2% in overnight trading. In its third-quarter shareholder letter, Pershing Square noted that the S&P 500 rose slightly more than 2% in the third quarter, but the median change among constituents was a decline of 4%. More than 60% of constituents closed lower in the quarter. As of September 30, the S&P 500 was up 13% year to date, while the average gain among constituents was only 1%. At the same time, based on the change in expected earnings per share for S&P 500 constituent companies, the median rose 4% in the quarter and nearly 10% cumulatively in the first nine months of the year. Pershing Square said this divergence has created buying opportunities: some cloud computing companies focused on building AI computing power resources and large technology giants have seen fundamentals improve while their share prices have remained weak. Pershing Square, founded and led by Ackman, said in its shareholder letter that semiconductor and technology hardware suppliers have significantly benefited from AI-related spending. So far this year, the S&P 500 Semiconductor Index has surged 44%, while the Technology Hardware Index has risen 36%. However, Wall Street is "punishing hyperscale data center operators" for construction costs while ignoring their strong growth potential. "AI computing power-related infrastructure construction has been one of the main drivers of stock market performance this year, with the companies providing the 'picks and shovels' being the biggest beneficiaries." However, large cloud computing and technology companies including Microsoft Corporation (MSFT.US), Facebook parent Meta Platforms (META.US), Amazon.com, Inc. (AMZN.US) and Alphabet Inc. Class C parent Alphabet (GOOGL.US), despite earnings growth of about 27%, saw their share prices rise only 8% on average, significantly underperforming the semiconductor index. "The decline in price-to-earnings multiples for hyperscalers stems mainly from investor concerns about how much return they can generate from significantly increased capital expenditures," Pershing Square wrote in its shareholder letter. Why does Ackman believe hyperscalers are poised to generate higher returns from AI investment? Pershing Square believes investors are ignoring the long-term benefits of large-scale AI infrastructure spending. The four major technology companies' combined capital expenditures in 2026 could reach US$740 billion, up from US$140 billion in 2023. Wall Street analysts unanimously expect that figure to exceed US$1 trillion in 2027. "We believe hyperscalers' capital expenditures are offensive rather than defensive. We believe they are investing not merely to protect their existing core businesses, but to accelerate growth, deploying capital into a transformative technology that can directly leverage their competitive advantages." "These advantages include unmatched distribution capabilities, long-cultivated customer relationships, proprietary data and the contextual information associated with it, the ability to deliver secure and reliable services globally, and strong balance sheet strength. This financial strength enables them to invest at a scale few competitors can match." Pershing Square said Amazon.com, Inc.'s AI investment is driving accelerated growth at AWS, whose third-quarter revenue grew 39%. AI is also improving the precision of advertising targeting, helping Meta accelerate revenue growth. Meta's Muse assistant surpassed 10 million downloads within just a few weeks, creating new opportunities to generate revenue through shopping, services and enterprise tools. AI is also creating growth opportunities through Azure, Microsoft 365 Copilot and GitHub. Some analysts expect large technology companies to continue investing heavily in AI infrastructure in the years ahead, but do not believe these companies' revenue growth will accelerate significantly after this year and next. Pershing Square believes analysts view these expenditures as an ongoing cost and fail to fully recognize their potential to drive substantial future revenue and profit growth. "In our view, analysts have fully incorporated hyperscalers' current construction costs into their forecasts, to the point that these companies are being 'punished'; but for the substantial future revenue and earnings growth, or even a new round of re-rating-style exponential growth, that these investments are likely to bring, they have given only limited long-term future growth expectations." Pershing Square said revenue growth in 2026 will largely come from AI investments made in 2024 and 2025. Therefore, the firm expects that current higher spending will drive stronger growth in the years ahead, potentially significantly exceeding analysts' consensus forecasts. Ackman bets on three major cloud platforms: the market sees this year's bill but underestimates next year's business In October, the Nasdaq 100 fell about 6.7%, and the Philadelphia Semiconductor Index fell about 15.4%; in particular, the Nasdaq 100's total market capitalization evaporated by more than US$2 trillion last month; in addition, last month (i.e., October), chip stocks in South Korea and Taiwan's stock markets that are critical to AI computing power infrastructure also suffered rare large-scale selloffs, especially in the South Korean stock market, where SK Hynix fell 20.2% marking its third-largest monthly decline in nearly a decade and Samsung Electronics fell 16.2% its fourth-largest monthly decline in nearly a decade. Ackman's judgment at this point is that with the same AI capital expenditure, one end has already become revenue for chip and equipment suppliers, while the other end will only become revenue for cloud platforms after the data centers are powered up and customers activate computing power; if analysts immediately raise spending forecasts without correspondingly assessing how much business the new capacity can bring, they may systematically underestimate the future earnings growth trajectory of the party funding the construction. Ackman's positive outlook and positioning on cloud computing and the technology sector come as global AI computing power demand continues to surge, but the massive funding needs brought by trillion-dollar-scale AI computing power resource procurement and AI infrastructure investment, combined with the surge in AI financing costs for AI neocloud companies such as CoreWeave and the two super cloud giants with long-term solid fundamentals Alphabet Inc. Class C parent Alphabet and Amazon.com, Inc. seeing AI-related debt climb while free cash flow turns fully negative, are also pushing the market to re-examine the heavy pressure of AI financing costs on AI-related technology companies and the cash recovery cycle associated with massive AI infrastructure investment. AI computing power demand is still expanding actively, but companies' ability to convert demand into deliveries, profits and free cash flow is becoming the basis for market repricing. Alphabet Inc. Class C parent Alphabet's share price, which suffered a record-style plunge of nearly 13% as of last Thursday's U.S. market close, and U.S. CPU and chip manufacturing giant Intel Corporation's share price, which suffered its worst single-day decline in more than four decades as of last Friday's close, both occurred at a time when scrutiny of cash returns on AI investment is intensifying. Ackman himself has expressed this positive bullish judgment through his positions. In an interview published on October 28, he said Amazon.com, Inc., Meta and Microsoft Corporation together account for about one-third of his portfolio. The three purchases had different backgrounds: Amazon.com, Inc. was bought after Trump announced "Liberation Day" tariffs; Meta and Microsoft Corporation were bought when capital expenditure commitments triggered market disappointment. This is a disclosure of existing positions and purchase rationale, though there is no actual evidence that he added all three positions during the late-October decline. On November 2, Ackman and Chief Investment Officer Ryan Israel highlighted in the shareholder letter new position arrangements seven new investments made year to date through the third quarter, and an eighth unnamed position established after the quarter began. A bullish research report on AI computing power and technology themes published by Nomura Securities on November 2 can be said to positively reveal the potential economic logic behind Ackman's trade negative free cash flow may come from paying first for construction and recognizing revenue in installments, and the time gap between the two cannot be directly deemed a massive loss. Pershing Square cited Amazon.com, Inc. management's explanation: the main data center building structure requires about two years of investment in advance and can be used for more than 30 years after commissioning; servers and networking equipment can be procured several months before commissioning, closer to customer demand. According to Amazon.com, Inc.'s estimates, servers pay back in slightly less than three years and have a useful life of at least five to six years. In the third quarter, AWS revenue grew 39% to US$46 billion, with an operating margin of 38.7%; Alphabet Inc. Class C cloud revenue grew 103% to US$30.7 billion, with operating margin rising from 23.7% to 36.2%; Azure revenue grew 48%. Overall, however, these latest figures support that computing power demand is being monetized, but cloud business margins as a whole cannot replace the return rate of individual new projects. The key to judging whether cloud computing giants have been "wrongly sold off" in this tech stock selloff is whether, after new computing power is commissioned, utilization and pricing can allow projects to recover investment and cover capital costs before equipment renewal. Deutsche Bank restores "Overweight," Morgan Stanley waits for buying point: Wall Street begins to seek bottom-fishing opportunities October's "invisible bear market" in the U.S. stock market was a period of sharp sector rotation. Based on The Kobeissi Letter's portfolio pain index, AI-related stocks in the U.S. market fell more than 13% that month, while an S&P constituent portfolio excluding AI rose about 8% and hit a new high on October 30. Deutsche Bank Aktiengesellschaft restored U.S. tech stocks from "Neutral" to "Overweight" on October 30: over the past three weeks, tech and mega-cap growth stocks fell about 11%, while the rest of the S&P rose nearly 6%, a performance gap of more than 16 percentage points. Deutsche Bank's rationale is that the relative performance of tech stocks has approached the lower end of its long-term range while earnings are still growing. In previous rounds of rotation back into tech stocks, the sector rose by an average of about 32%; however, this is a historical reference provided by Deutsche Bank, not a target for this round's gain. Morgan Stanley's Mike Wilson favors the after uncertainty fades. Regardless of which party wins the midterm elections, he prefers to position on dips, but retains a path in which the S&P 500 first tests 7,100 points and then repairs toward 8,000 points after the election results, AI financing pressure and liquidity situation become clearer. Goldman Sachs Group, Inc. derivatives strategist Brian Garrett provided a trading-level check: net leverage of U.S. fundamental long-short funds fell to 47%, in the 7th percentile of the past year; although funds were net buyers of U.S. stocks for the first time in four weeks, about 73% of purchases came from macro products and were mainly short covering. The three institutions' stances each have different emphases: Deutsche Bank has already raised its allocation, Wilson believes further declines would improve the buying point, and Goldman Sachs Group, Inc. sees room for retail and institutional investors to re-add positions recently, but evidence of sustained and active buying of tech stocks remains limited. Deutsche Bank's strategist team sees an opportunity to reallocate to tech stocks in the market's pessimistic pricing. The institution noted that tech and mega-cap growth stocks fell about 11% over the past three weeks, while the rest of the S&P 500 rose nearly 6%, with the former underperforming by more than 16 percentage points and having fallen back to the bottom of its long-term relative performance range. For tech stocks, the most investment-relevant change is that the price relationship between tech stocks and other sectors has adjusted significantly: the premium investors were previously willing to pay for AI growth has been rapidly compressed, while safe-haven rotation has pushed up the relative prices of other assets. Deutsche Bank therefore believes that a considerable portion of AI-related risks has been overpriced by the market. In a high-profile media interview on November 1 U.S. Eastern Time, Wilson further clarified his long-term bullish judgment on U.S. stocks, especially AI-related tech stocks: midterm elections, AI investment and financing disputes, and liquidity constraints may still constitute three types of events that could push the market briefly lower; but after these pressures are released in a concentrated manner, they may instead create opportunities for investors to re-establish equity risk exposure. He believes the S&P 500 could pull back to 7,100 points, about 9% below its recent record high, and then accelerate its repair toward 8,000 points. Statistics from another Wall Street financial giant, Goldman Sachs Group, Inc., show that net leverage of U.S. fundamental long-short funds fell to 47%, in the 7th percentile of the past year; in historical regressions, such positioning is usually accompanied by index drawdowns of more than 20%, while the S&P 500 is currently only about 3% below its record high. This also largely means that most institutional investors have already carried out a considerable degree of risk reduction in advance, and once earnings remain resilient and event shocks ease, the room to re-add allocation could become a rebound driver.