CNBC’s “The Exchange” team discusses the growing concerns over AI as well as Amazon and Microsoft's AI businesses with Alex Haissl of Rothschild.

Rothschild has downgraded Amazon and Microsoft, warning that the market is overly optimistic about the financial returns from generative AI investments. According to analyst Alex Heisel, each dollar spent on generative AI capital expenditures yields significantly less value than traditional cloud investments.

The analysis highlights that, unlike the early cloud era where hyperscalers captured substantial value, model builders such as OpenAI now capture more of the profits in the generative AI space. Rothschild suggests that unless there is a slowdown in capital expenditures and more sustainable growth, the current growth trajectory for these companies will remain low in value.

Why Rothschild's Haissl downgraded Amazon, Microsoft

Rothschild downgrading Amazon and Microsoft this morning saying that it's time to take more cautious stance on the hyperscalers. Now they warn the industry has been too trusting that Jenny is quote just like early cloud one point. Oh and that narrative is looking increasingly misplaced. So for more let's bring in the analysts behind that call. Alex Heisel of Rothschild and Co. Redburn. Alex it's great to have you on. And let's start right there. Why downgrade these two names specifically. Because the market is still pricing in an overly optimistic scenario with regards to generative AI. I mean our work really shows that every capex dollar spent on generative AI the net present value is only 20 cent. Right. And for traditional cloud we have like a six X higher number which is like one point four dollars on the dollar spend. The problem that we really see is that the market is still pricing in like an overly optimistic scenario because everyone is buying into this narrative. Hey don't worry. Our generative AI is just like the early days of the cloud and it simply is not. OK. So what did you find then when you start comparing it and actually stripping it down to apples versus apples. What did you find then. And what is the translation for margins for free cash flow for some of these other key metrics that investors need to be keyed in on. Yeah I mean first of all when we look at the early days of the cloud you know the hyperscalers have been quite conservative with regards to like to serve a lifetime assumptions. We started off like with three years and now on the GPU side we have like five six years to have a lifetime assumptions. So I'd like for like comparison. The truth is the capital intensity is significantly higher. The other point we really want to flag here where the differences are through the cloud period. The hyperscalers have captured a lot of the software layering on top. When you talk about software laying is a particular the past layer databases etc. With generative AI you have the model builders like a drop again open AI. In fact they are the new platform. So they capture much more of the value. And that unfortunately means for the hyperscaler they're operating in a lower part of the stack which is simply not as attractive in terms of like to profile. You say in your note that you are not close to a bear case at this stage given the solid growth outlook but that the growth is largely priced in. So if you see these stocks continue to sell off here will you think about them a little bit differently. Yeah I think what we want to see is you know that the growth versus like CapEx trajectory has to change because growth can be in line with our expectations a little bit ahead of the street. But the CapEx figures are just too high. So I think what we really need to see is a CapEx slowdown and a sustainability of like growth because otherwise it just continues with growth figures being OK. But it's a very low value growth. So something has to change fast to be more constructive.

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