Investing.com -- The DeepSeek news has reignited concerns over the AI infrastructure build-out, leading investors to reassess the duration of the data center capital expenditure (capex) cycle.
Since the announcement, electrical stocks have dropped by an average of 15%, shedding approximately five turns of multiple, as the market factors in potential long-term demand risks.
According to Bernstein analysts, "this move knocked 5% of earnings per share (EPS) compound annual growth rate (CAGR) out of these stocks."
Despite the reaction, Bernstein sees continued strength in the AI-driven capex cycle. Hyperscalers have guided to 2025 capex of $335 billion, marking a 35% increase from 2024’s 50% growth rate.
The outlook remains broad-based across the six core companies, with growth projections ranging from 20% to 70%.
"History suggests that these companies spend in 4-year pulses, and we are only 30% into the current cycle," Bernstein notes. A prior channel check with a former head of Data Center Portfolio Strategy at Google (NASDAQ:GOOGL) suggested the AI build-out could take up to eight years, aligning with typical ROI measurement timeframes.
Tracking hyperscaler capex inflections, Bernstein observes that market signals often indicate shifts ahead of official guidance. A correlation between hyperscaler capital intensity and share price performance serves as a leading indicator.
Currently, that correlation stands at +0.90 when excluding Microsoft (NASDAQ:MSFT) and +0.35 when including it, suggesting capex expansion will continue. However, Bernstein also points out that "hyperscaler share price momentum dictates the pace of capex growth rate, and it is currently fading, which suggests the growth rate will continue to slow."
Near-term data center investments further support the case for continued demand. Bernstein highlights that US data center investments are set to rise 24% to $35 billion in 2025, up from $28 billion in 2024.
The long-term US project pipeline now stands at $330 billion, with global commitments reaching $770 billion, reflecting a 90% year-over-year increase. Given the current construction pace of $30 billion per year, Bernstein estimates that "the US project pipeline extends out to 2035 or ~10 years."
With long-term AI infrastructure growth intact and near-term demand holding steady, Bernstein remains constructive on electrical stocks.
"Our recent channel check with the former Director of Data Center Construction at Microsoft eased our concerns on this front," the analysts led by Chad Dillard stated.
Despite recent underperformance, they continue to favor names like Quanta Services (NYSE:PWR), Schneider Electric (EPA:SCHN), Eaton (NYSE:ETN), and Hubbell Inc (NYSE:HUBB). Among these, Quanta Services appears to have been disproportionately impacted.
“With the longer term growth outlook derisked and solid near term growth ahead, we remain buyers of electrical infrastructure stocks,” analysts said.
For investors seeking a hedge against AI volatility, Bernstein suggests agricultural equipment stocks, which exhibit a negative correlation to the AI infrastructure trade.