DeepSeek's reportedly lower-cost AI models have made investors uneasy about big spending from U.S. tech giants such as Amazon. But the hundreds of billions of dollars that American tech giants are dedicating to AI now could give the companies a long-term advantage over peer companies in China, stock market analysts with UBS said Wednesday.
Shares of China tech giants such as Alibaba, Baidu and Tencent Holdings have so far this year outperformed U.S. tech leaders Amazon, Microsoft, Facebook parent Meta Platforms and Google parent company Alphabet.
China stocks are rebounding from a sluggish 2024 while U.S. tech firms are cooling from a two-year rally amid a range of economic concerns. But questions about AI spending commitments are also weighing on shares of U.S. tech giants.
A "lingering sense of nervousness remains among AI investors, primarily centered on the concern that Chinese AI developers and their low-cost models threaten to usurp U.S. competitors with higher sunk investment costs," a team of UBS analysts led by Global Wealth Management Chief Investment Officer Mark Haefele wrote Wednesday.
However, Haefele offered three reasons why the long-term AI advantage could tilt toward U.S. tech companies.
Amazon Stock: U.S. Tech Capex Outpaces China
The first advantage that UBS analysts see for the U.S. is the huge amount of money that tech giants are committing to developing AI infrastructure, such as data centers.
Amazon, Microsoft, Meta and Alphabet will spend a combined $302 billion in capital expenditures this year, according to UBS estimates, up 35% year over year.
China's four leading tech companies – Alibaba, Baidu, ByteDance, and Tencent – will spend a combined $51 billion, according to UBS estimates.
"The absolute spending in the U.S. remains almost six times higher, providing a clear scale advantage," the UBS analyst note said. "Scale increasingly matters as LLMs (large language models) develop to become reasoning models that require significantly more computational power to fulfill the tasks asked of them."
However, some tech leaders are taking a different view. The UBS note comes a day after Alibaba Chairman Joe Tsai said he was "astounded" by the spending on AI data centers by U.S. tech companies and views the expenditures as not "entirely necessary."
Research Spending On AI
Meanwhile, the largesse of U.S. tech also extends to research and development spending.
The top three cloud-service providers in the U.S. – Amazon, Microsoft and Alphabet – are expected to spend $180 billion combined this year on research and development, according to UBS forecasts. Meanwhile, China's three top cloud platforms – Alibaba, Tencent and Baidu – are set to spend $35 billion, per UBS forecasts.
"This significant difference underscores the US's commitment to fostering innovation and maintaining a competitive edge in the AI sector, in our view," Haefele and the UBS team wrote.
Amazon, Microsoft Have Monetization Advantage
Finally, UBS says U.S. cloud providers have so far been more successful in monetizing their AI offerings.
"The top three US cloud platforms are projected to generate 12 times more cloud revenue than their Chinese counterparts, despite spending only 6-8 times more on cloud/AI capex," the note said.
The U.S. tech firms have a larger addressable market and stronger pricing power, in UBS' view.
Amazon Stock Tests 21-Day Line
On the stock market today, Amazon stock is down more than 1% at 202.85 in recent trading. Shares are trading just above Amazon's 21-day moving average after gaining 3.6% Monday and 1.3% Tuesday.
U.S. tech stocks were in general giving up some ground after a strong start to the week. Meta stock is down 1.5% at 617.07 in recent trades. Microsoft stock is down a fraction at 393.90. Google parent Alphabet was trading 1.5% lower on the day at 168.01.
Meanwhile, U.S.-listed Alibaba stock was up a fraction at 133.31 in recent action. Baidu stock was up 2.4% at 97.64. Tencent shares, which trade over the counter in the U.S., were up a fraction at 64.95.
