Yardeni: AI Investment Enters Results-Driven Era, Market No Longer Pays for Hype

Yardeni Research's latest report indicates that investors are no longer accepting large cloud service providers' (hyperscalers) AI strategies at face value, as they did during the early stages of the AI wave. Instead, they are beginning to reassess investment value based on each company's actual capital expenditures, signed orders, and cloud business growth performance.

The AI investment boom is entering a new phase. The latest report shows that Amazon (AMZN-US), Alphabet (GOOGL-US), Microsoft (MSFT-US), and Oracle (ORCL-US)—the four major cloud providers—are expected to spend a combined $600 billion on capital expenditures in fiscal year 2026, a significant increase from $309 billion in fiscal year 2025.

Due to factors such as power supply constraints, equipment delivery delays, and local government permitting, many data center construction timelines have been delayed to 2027 or later. However, Yardeni believes this reflects a deferral of construction schedules rather than a reduction in AI investment.

Citing data from research firm Sightline Climate, Yardeni points out that out of 777 large-scale data center projects currently tracked, only 9 have been truly canceled. This indicates that AI infrastructure investment continues to advance steadily, with no clear signs of weakening demand.

In addition to expanding capital expenditures, the four major cloud providers also hold substantial unfulfilled contracts (RPO).

As of fiscal year 2026, the combined RPO of the four companies exceeds $2.3 trillion, with Microsoft leading at approximately $678 billion, followed by Oracle at around $638 billion—indicating a large pipeline of contracted but not yet recognized revenue expected to materialize in the future.

However, Yardeni also warns of customer concentration risk, particularly whether OpenAI and Anthropic can fulfill their massive computing power procurement commitments as planned.

S&P Global Ratings downgraded Oracle's credit rating to BBB- in July this year, citing its high reliance on OpenAI, reflecting market concerns over such risks.

The report also notes that funding sources for AI infrastructure investment are changing.

In the past, large cloud providers primarily funded capital expenditures through internal operating cash flow. However, as investment scales rapidly expand, free cash flow is no longer sufficient to fully support these outlays.

Alphabet recorded negative free cash flow for the first time in a single quarter during Q2 2026, while Amazon reported a cash outflow of $7.6 billion over the trailing 12 months ending June.

According to Goldman Sachs estimates, in 2025, about 26% of large cloud providers' capital expenditures were financed through external funding (mainly debt), expected to rise to 33% in 2026 and potentially reach around 35% by 2027—indicating increasing reliance on external capital for AI investment.

Despite rising costs, cloud businesses at these companies continue to show strong growth. Microsoft's Cloud revenue reached $214.3 billion in fiscal year 2026, up 27% year-on-year. AWS generated $134.7 billion in revenue over the past four quarters through June, up 50% year-on-year. Google Cloud revenue was $77.7 billion, up 60%, and Oracle Cloud revenue was $34 billion, up 39%.

Yardeni states that the market no longer views large cloud providers as a single investment group but evaluates each company individually based on their AI investment strategy, RPO size, and actual cloud revenue performance.

Looking at stock performance this year, Oracle has declined 28% year-to-date due to concerns over deteriorating free cash flow and heavy reliance on OpenAI. Microsoft, however, has recovered some losses after stronger-than-expected cloud results. Alphabet is up 20% year-to-date, and Amazon has risen about 18% year-to-date, driven by AWS financial results.

Yardeni concludes that the core of AI investment has fundamentally shifted. The market no longer assigns high valuations solely based on expectations for AI's future but increasingly emphasizes whether companies are truly delivering revenue growth, order visibility, and tangible results from capital investment.