AI spending is soaring, but revenue is lagging: Here's why Indian investors should pay attention
Artificial intelligence (AI) has become the biggest driver of global stock markets, with companies spending hundreds of billions of dollars to build AI infrastructure. While
Artificial intelligence (AI) has become the biggest driver of global stock markets, with companies spending hundreds of billions of dollars to build AI infrastructure. While investor excitement remains high, experts believe the economics behind the AI boom are far less convincing than the market suggests. Karan Aggarwal, Co-Founder & CIO at Ametra PMS, says the gap between AI spending and the revenue it currently generates raises important questions for investors, especially those investing in global equity funds with significant exposure to US technology stocks. AI spending is racing ahead of revenue “The gap between approximately $725 billion of AI capital expenditure and only $50-60 billion of current AI revenue matters because it translates into less than $1 of revenue earned for every $10 invested annually. Importantly, this is revenue, not profit,” Aggarwal mentioned. In simple terms, companies are investing heavily today in the hope that AI will become highly profitable years later. Whether those returns eventually materialise remains uncertain. Cash flows are coming under pressure The AI race is also becoming expensive for the companies leading it. Aggarwal points out that most large hyperscalers are using nearly all of their free cash flow to fund AI expansion, while some are borrowing money or raising fresh equity to continue investing.
“At present, AI capex is accounting for 94% of free cash flow of hyperscalers, and this number is projected to rise to 157% by 2030. Hyperscalers would become debt-laden companies burning cash into unknown and unproven growth avenues,” he said. For investors, this means today's earnings may increasingly be sacrificed in pursuit of uncertain long-term gains. Adoption is growing, but monetisation remains weak AI is being adopted across industries, but generating meaningful revenue from it has proved far more difficult. Citing an MIT NANDA study reported by Fortune, he said 95% of generative AI pilots fail to reach production. The consumer story is equally bleak. According to NPR, only 3% of consumers actually pay for AI services. He also pointed to Sequoia Capital's estimates showing the AI revenue shortfall widening from $125 billion in 2024 to nearly $600-700 billion today, highlighting how infrastructure spending continues to outpace demand. A lesson from the dot-com era Aggarwal believes the current environment bears similarities to the internet boom of the late 1990s. “It seems very similar to the internet bubble of the early 2000s, where the internet saw widespread adoption but nearly 80% of internet firms went out of business,” he said.
The BriefWire