This is the critical detail that could unravel the AI trade: Nobody is paying for it.

Morningstar – “Late last year, David Shor, one of the Democratic Party’s top data scientists, surveyed some 130,000 voters about whether they had a “favorable” or “unfavorable” opinion of Jewish people. Hardly anyone over the age of 70 said their view was unfavorable. More than a quarter of those under 25 did. The question is not whether America’s self-understanding is changing; it’s how far that change will go—and what the consequences will be.Free cash flow has turned negative for Amazon and Oracle and declined for Alphabet and Meta amid heavy AI spending. Those who bet against the artificial-intelligence growth story have found themselves missing out on an epic multiyear rally. But there’s increasing evidence that an AI revolution may be hitting a cashless brick wall. While the stock prices of some of the biggest technology companies have climbed almost straight up since April, something else is dropping: free cash flow, or the newly generated cash remaining after the tech behemoths pay their operating expenses and soaring capital expenditures. Chasing AI hasn’t been cheap for the big hyperscalers – the cloud-services providers building out the infrastructure powering the AI boom. They are investing massively. Alphabet Inc. (GOOGL), Microsoft Corp. (MSFT), Amazon Inc. (AMZN) and Meta Platforms Inc. (META) are on track to spend nearly $400 billion this year on capital expenditures. It’s a marked departure from these companies’ previously capex-light business models. But very few businesses or consumers are actually paying for AI. So free cash flow has been declining for hyperscalers, with the exception of Microsoft. For the past two reported quarters, free cash flow has been negative for Amazon and Oracle, and it has declined for Alphabet and Meta. That means less cash is available to be returned to shareholders through stock buybacks or dividends. So far, Nvidia Corp. (NVDA) has been the big winner, reaping the benefits of supplying the AI gold rush by selling the graphics processing units that are housed in the hyperscalers’ data centers. Demand for GPUs has been so high that Nvidia has been supply-constrained for years. But at some point, the hyperscalers might be reluctant to keep burning cash….A recent report published by MIT’s NANDA initiative found that 95% of enterprise organizations using AI applications found no material impact on their profits. Underwhelming results are causing companies to pause spending on enterprise-AI software tools due to “decision fatigue,” according to a recent report from Jefferies. This sort of analysis hit Wall Street this week, and AI’s return on investment has come under the spotlight. Stocks slid, with the decline led by large-cap tech names. The Roundhill Magnificent Seven exchange-traded fund MAGS has dropped 3% since Monday.

Meanwhile, Meta has frozen its AI hiring plans amid a restructuring of the division, the Wall Street Journal reported Wednesday. Meta’s reported AI hiring freeze marks a sharp contrast to its recent spending spree, which included a $14 billion investment in the startup Scale AI and reports of $100 million pay packages for top AI talent. If widespread AI adoption fails to materialize, hyperscalers risk being saddled with billions in overbuilt infrastructure and a severe lack of demand. Investors will be watching to see if this historic capex cycle pays off – or turns into a write-down.

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