Is an AI stock bubble looming? That's the $167 billion question.

By Emily Bary

AI capital-expenditure projections are out of step with AI revenue projections, which Barclays says may encapsulate FOMO, or the fear of missing out

Will the frenzied spending on artificial intelligence drive major revenue boosts for internet companies - or are those big spenders getting ahead of their skis?

That's a key question for investors these days, according to Barclays analyst Ross Sandler, who noted Tuesday that the math doesn't appear to add up. Wall Street expectations are for roughly $60 billion in incremental capital expenditures on AI but just $20 billion in incremental cloud revenue for 2026.

"One of the hottest debates today in the investment community is whether all the AI capex investment going into data centers will end up being a 2000-esque [telecommunications]-bubble overbuild, or whether there is enough AI [revenue] demand to justify," Sandler said in a note to clients.

Read: The AI 'bubble' has helped the U.S. stock market dominate the world. What happens if it bursts?

Answering that question depends on which scenario investors deem most likely when trying to make sense of the discrepancies between projected AI spending and projected AI revenue. Investors have to ask whether they think revenue expectations are correct, meaning that the capital spending is too high to support that, or whether revenue projections understate the future impact of AI on financials.

Sandler thinks the rush of AI spending - a cumulative $167 billion since the AI frenzy kicked off - could reflect a bit of FOMO, or fear of missing out, rather than a "Field of Dreams scenario" in which widespread AI revenue will soon manifest in a big way.

You could call that a $167 billion question, though Sandler goes a step further in dubbing it "the gazillion-dollar question."

See also: Nvidia is 'both king and kingmaker,' and these chip stocks could pop in its wake

"Based on our preliminary work here, the consensus estimate for hyperscaler AI capex in 2026 is enough to support the existing internet plus 12,000 new ChatGPT-scale AI products," he wrote. But Wall Street is worried about whether there will actually be anywhere close to that many AI applications that can generate revenue, according to Sandler.

From his standpoint, Sandler sees the potential for "lots of new services that will bring some of this bull case to light, but probably not 12,000 of them." Outside of China, there are about 50 consumer apps in general that have more than 50 users, while in the software market, perhaps a few dozen big software companies together rake in roughly 1 billion seat licenses.

By that math, "even if all these products were replaced by competing AI products, there is no way the revenue from said AI products justifies the capex slated for 2026," Sandler said.

He acknowledges AI services could end up sporting far deeper engagement metrics than their traditional counterparts. In such a scenario, the possible AI revenue impact might now be understated. For example, he notes that Character.ai sees a fifth of the daily inference requests relative to what Alphabet Inc.'s (GOOG) (GOOGL) Google sees, even off a much smaller user base.

"Just five Character.ai's is the same as one Google?" Sandler asked. "That's pretty wild to think about."

Overall, though, when it comes to the big investment debate, he wrote that he and his team are "leaning FOMO and expect someone to flinch next year, but it's still very early for AI."

While he's focused on internet stocks, he added that the trend "doesn't likely mean [Nvidia] (NVDA) is in any kind of trouble in the medium term, as we expect the AI capex to keep going strong for a couple years before someone blinks and cuts back."

More from MarketWatch: Is Nvidia doomed to be the next Cisco or Intel? Here's what investors need to know.

-Emily Bary

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

06-27-24 1031ET

Copyright (c) 2024 Dow Jones & Company, Inc.