Hyperscalers' AI spending boom isn't over, says analyst

It's a gold rush like nothing seen since the dawn of the Internet. Virtually every business is rushing to capitalize on artificial intelligence.

Manufacturers are using AI to improve supply chains and quality. Retailers are using it to boost sales and prevent theft. Healthcare companies are using it to design better medicines. Finance is using it to hedge risks.

You get the gist... Even the military is in on the action, exploring its use on the battlefield.

The flurry of activity has meant a tidal wave of demand for computers with the power necessary to crunch AI's heavy workloads. This task is ill-suited to the legacy central processors found in most data centers, so companies are spending big money updating their network infrastructure -- padding profits for AI darlings like Nvidia,

The situation isn't lost on long-time veteran analyst Sam Stovall, CFRA's Chief Investment Strategist. Stovall has been tracking stocks for over 30 years, and despite hundreds of billions already spent, his team thinks data centers still have a lot of work to do.

Servers and chips are modern-day picks and shovels

In the gold rush, it was said that most of the money was made by those selling the picks and shovels to those traveling west in search of riches.

The modern-day equivalent could be players like Nvidia (NVDA) , Broadcom (AVGO) , AMD (AMD) , and Super Micro Computer (SMCI) , companies at the heart of supplying the demand for faster, more efficient data center infrastructure.

Related: Nvidia AI outlook resets after Meta Platforms, Microsoft update plans

The darling, of course, is Nvidia.

Nvidia's highly optimized graphics processors for gaming and crypto mining proved the perfect tool for data hogging AI apps, causing sales to surge after ChatGPT's launch shocked the planet and caused a major re-shift in IT budget priorities.

Sales of Nvidia's GPUs -- first the H100, then the H200, and now its Blackwell lineup -- have grown from below $27 billion in 2022 to a stunning $130 billion last year.

The reason? Its GPUs are paired with next-gen CUDA software optimized to keep workflows humming along more efficiently than any other chip option on the planet.

Availability, however, has been troublesome. Nvidia's demand has been higher than it can meet, and data centers have gotten creative, leveraging specialty chips, such as ASICs made by Broadcom and others, to fill in the gaps.

AMD also recently joined the party, launching its GPU line-up to carve away some of Nvidia's whopping 90% share of the AI chip market.

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It's not just chips, though. It's the entire stack. And servers that can handle all the activity are also being bought by the pallet. Super Micro, a specialty server player with a liquid-cooled lineup, has seen its revenue surge to nearly $22 billion from just a shade over $5 billion in 2022.Nvidia's CEO Jensen Huang has ridden a tidal wave of demand thanks to surging AI activity.Image source: Edelson/Getty Images

Data center spending is going higher, says Stovall

Investors have been handsomely rewarded for owning the likes of Nvidia, Super Micro, and Palantir, which provides the platform many companies use to build their AI apps.

Since 2022, those three companies have generated returns of 1,100%, 2,330%, and 421%, respectively, for investors.

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It hasn't been a straight line higher, given some nerve-racking pauses and dips along the way. Based on Stovall's analysis, it's certainly possible we're about to experience another pullback in IT stocks soon.

Still, the longer-term outlook is pretty compelling.

"We continue to see upside to consensus estimates over the next 2-3 years, with annualized earnings growth of at least 15%-20% validating the sector multiple with higher AI infrastructure spend to remain the core driver to growth," wrote Stovall in a note to clients. "We think data center spending is poised to more than double to over $1 trillion by 2028, with the Big Four stocks representing about half of the total as the customer base broadens."

A doubling in spending by 2028 is pretty eye-popping, given what we've already witnessed.

If Stovall is correct, many people may be surprised, given arguments that IT stocks, including Nvidia, Palantir, and rivals, are overpriced.

What's next for AI stocks?

During the Internet boom, stocks surged too far too fast, pricing in tremendous growth and setting the bar incredibly high.

As a result, I saw many of the high-flyers cut in half or worse, go out of business, despite the fact that spending to build out the Internet was continuing to climb.

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There will undoubtedly be winners and losers, making quality key. Investors in Lycos and Pets.com never recovered, but those who bought and held Amazon through thick and thin have made unfathomable wealth.

Anything can happen, but it wouldn't surprise me if quality again comes out on top.

Those companies with the size and pockets deep enough to pivot and expand will likely flourish, while those losing money and operating on shoestring budgets could wind up in Wall Street's proverbial dustbin.

That said, Stovall's outlook is largely optimistic for earnings growth for AI-related companies, and revenue and profit growth are the lifeblood of stock prices.

"We continue to have a positive fundamental outlook on the sector," wrote Stovall. "But acknowledge that some digestion of recent gains is warranted. We note that the sector P/E multiple on next 12-month estimates is near the high-end of its 20-year historical range."

Cheap? Nope. But that may not mean any short-term downside is more than a pullback in an uptrend. The music may stop at some point, but nobody knows when.

As far as CFRA is concerned, it still rates the information technology sector an overweight, despite the risk of short-term weakness.

Related: Nvidia’s China deal controversy puts US officials on their back feet

This story was originally reported by TheStreet on Aug 21, 2025, where it first appeared in the Technology Business News section. Add TheStreet as a Preferred Source by clicking here.

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