The trillion dollar question – will the artificial intelligence spend pay off?
In this video insight, I question whether the trillions being poured into artificial intelligence (AI) infrastructure can ever be justified. By 2028, the industry’s hardware and data centre spend could exceed US$3 trillion, yet customers would need to spend over US$3 trillion a year – around 10 per cent of U.S. gross domestic product (GDP) – to make the math work. Unless adoption and profits scale far faster than history suggests, this AI rocket ship could run out of fuel.
Transcript:
Hi everyone, welcome back. Today we’re talking about something huge – literally. The artificial intelligence (AI) industry is spending trillions on data centers, chips, and servers… but here’s the trillion-dollar question: Can customers actually spend enough to justify the investment? Are these hyperscalers or just hyperactive?
If customers don’t have the readies to spend on all the forthcoming AI tools… this whole AI rocket ship might run out of fuel….According to McKinsey, 60 per cent of AI data center spending is going into chips and hardware. These things wear out – they’re depreciated over about 5.5 years.
Morgan Stanley says the industry’s on track to spend $3 trillion by 2028 and a lot of that’s back-loaded – meaning the big bills hit later. So let’s do the maths; if these assets generate no economic profit after that 5.5 year period then just the semi conductor chips and hardware investment alone would need to generate a net cash flow of over $US500 billion in 2028 to meet the cost of capital on just the equipment investment. That’s the conclusion reached by U.S. investment house St James.
And there’s more – it gets crazier. If data center operators want a 20 per cent free cash flow margin – the kind that justifies their sky-high stock prices – they’d need $2.5 trillion in annual revenue.
Now, their customers – you know, the businesses and people using AI agents, Large Language Models (LLMs), and all that – they want 20 per cent margins too. So how much do they need to spend on AI services? The estimate is $3.1 trillion.
That’s 10 per cent of the entire U.S. Gross Domestic Product (GDP).
Let’s put that in perspective: U.S. military spending? 3.5 per cent of GDP. Total federal government spending in 2025? $7.3 trillion—that’s 23 per cent of GDP. Total spending on Microsoft’s windows globally is $95 billion. So AI services would need to be bigger than the Pentagon… almost half the size of the entire U.S. federal budget or 32 times the total global spending on windows.
St James also points out that Netflix with its 300 million subscribers, is pulling in $39 billion.
AI’s potential is real. It’s transformative. But this math shows something critical: The hype depends on monetising FAST – and at a scale we’ve never seen. And I haven’t included the energy costs, the possibility that a company buys old chips and doesn’t get full value before they’re superseded, or a company commits to a data centre that can’t get cheap energy or…or..or… you get the drift. The dream and hype meets commercial reality.
And if adoption slows? If return on investment (ROI) doesn’t show up in boardrooms? Then all this capex becomes a multi-trillion-dollar write-off. So ask yourself: Are we building the future… or a bubble?
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
