There's a hidden risk lurking for AI stocks in 2025
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Companies are facing rising depreciation costs from their massive chip investments, Barclays says.
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Barclays warns these costs will significantly impact earnings estimates for top tech firms.
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Depreciation costs could lead to AI stock price declines and valuation scrutiny, according to Baird’s Ted Mortonson.
Companies getting a boost from the booming AI trade are in a race against the clock to prove that their massive investments in GPU chips are paying off, but there’s a little-talked-about issue that will make that endeavor even harder.
Depreciation related to massive AI chip investments is the “not-so-hidden” cost of AI that few investors are factoring into their valuation analysis of these companies, analysts at Barclays said in a note earlier this year.
Depreciation is an accounting method that allows companies to spread out the cost of a capital investment over its useful lifetime. That means that when a mega-cap tech company buys billions of dollars worth of GPU chips, it doesn’t immediately record that as an expense, but rather as a capital expenditure.
That can lead to big profits upfront, as the capital outlays don’t hit a company’s profit and loss statement immediately but are rather recorded as a depreciation expense over the asset’s useful lifetime.
The lurking problem is that the useful lifetime of AI GPU chips can be a lot shorter than many expect, especially as AI chips go through an ever-accelerating innovation cycle, leading to higher-than-expected depreciation expenses that ultimately drag down profits.
The depreciation costs related to GPU chips will be so big that Barclays is trimming its earnings estimates of cloud hyperscalers Alphabet, Amazon, and Meta Platforms by as much as 10% heading into next year.
“Depreciation of AI compute assets is the biggest expense for these leading companies,” Barclays internet analyst Ross Sandler said. “We think this is a risk that may rear its ugly head as we start looking ahead into 2025, so we are flagging it early.”
With mega-cap tech companies spending hundreds of billions of dollars on pricey GPU chips from the likes of Nvidia, massive depreciation costs will add up over the next few years, especially as Nvidia shifts to a new product launch cadence of one per year.
“Because Nvidia has this very aggressive design cycle of roughly a year between major releases, all of those products have different skews and functionality and power profiles,” Baird managing director and tech strategist Ted Mortonson told Business Insider last month.
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