Dear Reader,
Last week, I talked about the massive capital spending we're seeing on AI from the Magnificent Seven, big tech companies.
It's really unprecedented. And we wanted to reshare with you a reader favorite from earlier this year when I dug into exactly this…
When you look at what Amazon, Google, Meta, Microsoft and all these companies are doing – they have committed publicly in their earnings reports to spending a combined $300-$400 billion in capital expenditures for 2025.
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Now in dollar terms, this spending for data centers and energy, is unlike anything we've seen since the dot-com boom.
It's a big deal.
Investors are really starting to say, “okay, at some point, we need to see a return on that investment.”
And here’s a lesson I learned from Ben Graham and Warren Buffett in the book, The Intelligent Investor.
They talk about the airline industry in the 1960's...
In 1960, the airline industry flew 10 million people a year.
By 1970, they flew 100 million passengers a year.
That's a huge, 10X increase.
Yet the airline industry lost $2.3 billion that decade.
Why?
In a word, overinvestment.
They invested way more in infrastructure than was actually needed. Which we discussed last week.
People like to say, in every bull market, “this time is different… this time is different.” The four scariest words in investing history.
Now folks are saying, when this bubble pops, one of the big triggers here will be investors finally saying, “enough.”
The question becomes, what are you actually getting from this investment? Or has this just become a kind of “arms race” mania?
Because when you look at the numbers…
Microsoft announced an 80% increase in capital expenditures, and an expected revenue increase of 13%.
Meta announced a 74% increase in capital spending, and expect a revenue increase of 14.66%.
Alphabet is jumping 42% in CapEx, and predicting 9.5% revenue growth.
And Amazon announced a 26% increase in capital spending with a projected 10.75% revenue growth increase.
When you see revenue only grow a little bit, but spending grow a lot, what happens to profit margins?
They shrink.
And when profit margins shrink, what happens to share prices?
They go down.
At some point, which I and a lot of smart people out there believe is sooner than later, investors are going to demand a return on that investment.
They’re going to want to see what every $10 billion one of these companies spends actually shows in return to shareholders.
And it's something that should be on your mind, too.
There are over 6,000 stocks listed in the market right now.
And even with many of them jumping on the AI bandwagon…
They will NOT make you rich.
However, there is one stock that stands head and shoulders above everything else.
It’s currently trading for under $20…
And even though it has nothing to do with AI at first glance…
Elon Musk says, “civilization would crumble” without this investment.
And Warren Buffett invested $40 billion just before retiring.
I consider this the last retirement stock you may ever need.
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