The 'Fast Money' traders talk AI downgrades dragging on Amazon and Microsoft.

New York

The release of Open AI's ChatGPT has accelerated the development of artificial intelligence and warnings about its impact on society.

Rise of AI

Analysts have downgraded Amazon and Microsoft from 'buy' to 'neutral', expressing concerns that management teams may be receiving too much benefit of the doubt regarding their aggressive AI investments. The discussion on CNBC's 'Fast Money' emphasized that the shift from asset-light to asset-heavy business models, funded increasingly by debt, could threaten company margins and raise questions about long-term profitability.

While Amazon's cloud business continues to show strong growth, the costs associated with AI build-outs are significantly higher than previous expansions, leading to uncertainty about future returns. Investors are now demanding clearer paths to profitability and are closely watching upcoming earnings, especially from Nvidia, for further signals on AI demand and investment viability.

'Fast Money' traders talk AI downgrades dragging on Amazon, Microsoft

Analysts writing that management teams are getting way too much benefit of the doubt and that any missteps in AI deployment Can quickly make investments in this massive build-out value negative Both stocks were cut from buy to neutral in video meantime now riding a five-day losing streak into earnings tomorrow It is down over 14 percent from its record high. So what do we do here? Are these sort of I? Don't know. I don't know if they confirm the fears that we've already seen or is this another reason why we should be bearish? Well, you could take the other side on Amazon So I can appreciate the fact and we brought this up yesterday when Jim was here about all the different things going on in The market and one of the things I mentioned is Amazon's out there in the market raising 15 billion No big deal except for the fact that what we've been very concerned about and look at that move in meta look at the move in those companies That we think are possibly overspending. I'm not worried about Amazon here both in terms of valuation or in terms of credit quality But I am of the view that the street in the market are demanding An answer in other words, what is profitability? I want to see some vision to profitability. I want to not just be Investing to infinity and then if you look at the market overall What clearly was a lack of breadth you combine that with a sense that the Fed is on a slower Dynamic and the fact that you've got maybe some weaker job numbers coming out you get to this place where now we can all say Suddenly we were investing too much in AI. I don't think so. I think that I think this downgrade is interesting I think it certainly comes at a time when people want to believe that some of these things are Themes we should be looking at I think the most important theme is that companies that were developing free cash flow are now going to Be issuing debt and it's not a one-way street. Yeah, and to that point I mean, it's a it's a change in the business model that I don't know if Wall Street has completely processed in terms of valuation Yeah, not only is it free cash flow positive to issuing debt It's also from an asset light to an asset heavy but business model there are many changes There are reasons why investors loved love this group of stocks high margins add that in there and now For Amazon though being in the cloud business that is an asset heavy business already already But yes But this is a matter is this sort of build-out is much more expensive than the previous traditional cloud build-out and so therefore margins are more threatened and this actually may be Value negative because it might not generate as much Profits revenues from this sort of cloud business given the spend So, I don't know how much of the cloud business is right now allocated to AI and it's just not called that or right So I'm not really sure but because the cloud business seems to be doing really nicely. They had really good growth They had really good margins. I Couldn't could it all be way too expensive? Yes, that's absolutely possible. I did think it was interesting there's sort of a little nuance in the note about They're going to a neutral Right, but the price target remains the same So I'm not quite sure what you know, why what that means actually we still think it's worth this Right, but now I guess it's what I'm negative note of caution, right? Yeah. Yes Exactly. I think the major question is if they're off putting their risk to a different dynamic then why shouldn't the investor? Right, so the not to make it any more complicated. They're not using cash. They're using bond sale Why should we look at it any better? It's got to be worse, right if they're not taking the risk with their cash or if it is that It is but they're doing a bond sale versus using free cash using free cash So I so I think that still an obligation on cat. I mean There's no free lunch, but I mean, it's better than them actually issuing equity for it I mean, it's not dilutive better better But what is it better when you look at a stock to do it the way they used to do it? Well, I mean the stock as we've all just said wants to see free cash flow to infinity I mean, I'm looking at a report from from Wolf Research where they're actually pointing out on Amazon that they actually believe that there's based upon the AWS Acceleration driven by a project Rainier that there's an upside to revenue and EBITDA Which means that there could be a multiple enhancement from this and and yet there's arguments in the other direction Yeah, and I think really investors are just finally waking up to this idea that there's been so much capex We just really need to see a return on that And you're seeing this risk being taken off kind of across the board that's happening AI When you look at the bonds that are getting issues There's a wider spread there people are demanding a higher yield for those bonds because they are starting to question at what point in time Are you actually gonna get paid out on that? So I don't think this is the bubble bursting I don't think this is the end of that. I think this is a pause that people are taking I do think Nvidia tomorrow is gonna be something that's very closely watched to see what does that demand look like? Are these chips, you know, do we still need the most expensive chips are people doing them in-house? What does it mean for the over a overall AI story? I think tomorrow is gonna be a bigger story right now It's just sentiment driven more so than any actual data You

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'Fast Money' traders talk AI downgrades dragging on Amazon, Microsoft

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