The spectacle of the so-called Magnificent Seven – Alphabet, Amazon, Apple, Tesla, Meta, Microsoft, and Nvidia – has been the defining market story of this generation.
Synonymous with the AI boom, their collective valuation, now commanding a fifth of global markets, is underpinned by the fervent belief that they alone will win the AI arms race.
But beneath soaring stock prices and trillion-dollar market caps, a divide is creeping in.
As the ‘AI bubble’ begins to show signs of inflation, the impact will not be a uniform crash, or ‘pop’, rather, but a reckoning that exposes which of these titans are built on sustainable fundamentals and, in turn, which rest on shakier ground.
The defining characteristic of this boom is the unprecedented and almost unimaginable scale of capital expenditure. We’re talking about an arms race here where Wall Street, through firms like Blue Owl, is financing data centres costing tens of billions.
The $1tn spending spree
Cloud behemoths Microsoft and Alphabet have been locked in a staggering battle for dominance in the intelligent cloud market.
For its part, Microsoft is running full steam ahead, with its finance chief, Amy Hood, noting that demand is so high the company “can’t keep up”, driving capital spending to an estimated over $80bn this fiscal year.
Not to be outdone, Alphabet has also recently committed a colossal $40bn to new data centres across the US, cementing its aggressive ramp towards AI dominance.
Elsewhere, Zuckerberg’s Meta is playing the same game, with plans to invest up to $72bn this year alone, risking billions to stay ahead, even as its costs soar by 32 per cent.
The firm’s chief marketing officer and VP of analytics, Alex Schultz, said: “In general, humanity has the ability to have a lot more abundance than it does,” arguing that the investment in these technologies is essential.
At the epicentre is Nvidia, whose chips are the single biggest drain on the industry’s coffers.
Its revenue growth has been stratospheric, with 56 per cent in its last reported quarter, making it the market’s proxy for the entire AI build out – the crucial barometer whose fortunes dictate market sentiment.
The issue is that analysts are now modelling almost surreal growth curves for Jensen Huang’s firm, expecting revenue to potentially reach $383bn by 2028.
This spending spree, which could cross the £1tn line in the next few years, would require $2tn in annual AI revenue to justify.
This tension is fuelling the consensus that the market is “frothy”. But, as OpenAI chairman and chief executive of Sierra, Bret Taylor, said: “It is both true that AI will transform the economy and that we’re also in a bubble, and a lot of people will lose a lot of money.”
Who falls the hardest?
When the bubble inevitably deflates, the subsequent fallout will not be equal.
The vulnerability of each of the Magnificent Seven firms is tied directly to the ratio of future promise compared to its current profitable reality.
In that sense, Tesla is perhaps the most exposed. Trading at a dizzying 263 times past earnings, its valuation is built almost entirely on highly speculative future products like ‘robotaxis’, leaving open the “possibility for a very unhappy ending.” This valuation is not supported by present earnings.
Meanwhile, the market is offering a degree of protection to the most diversified.
Alphabet’s valuation of 27 times earnings has been viewed as “not outlandish” because its massive cash flow from search and YouTube provides a robust safety net against its aggressive cloud spending.
Still, Apple is perhaps the most insulated. Its high valuation of 33 times earnings is supported by its fortress-like ecosystem.
Its services division, which contributes over 20 per cent of its revenue, and its base of over two billion active devices globally, create a recurring revenue stream less susceptible to volatile AI trends.
The scale barrier
The biggest defence the Magnificent Seven have is their sheer scale and deep pockets.
Each of them is financing their AI obsessions through massive debt and bond issuances, while smaller AI startups, such as legal AI firm Robin and London-listed Cykel AI, are failing to secure follow-on funding and crashing out.
This cannibalisation of smaller players by the giants is the ultimate prize of the AI arms race.
As Goldman Sachs suggests, the current conditions may resemble the early stages of the late 1990s tech boom.
The inevitable shake-out will not be a complete financial collapse, but an uneven transfer of wealth.
The largest firms will leverage their scale to survive and thrive, but the ultimate legacy of the AI bubble will be a final, albeit ruthless determination of which of the Magnificent Seven has the sustainable business model to justify the future they are aggressively funding.