Capital Spending Discipline in the Age of AI

“While the AI revolution promises immense potential, history warns that aggressive capital spending in infrastructure booms often leads to overinvestment, cutthroat competition, and disappointing stock returns, making disciplined capital allocation more crucial than ever."

With $5.2 trillion poised to flood into AI infrastructure by “Big Tech” over the next five years, more than the GDP of India or nearly enough to fund the U.S. federal government for a year, the scale of this investment is nothing short of staggering. The AI revolution is rapidly reshaping industries, triggering an unprecedented surge in capital spending. While the markets have responded with optimism, history offers a cautionary tale: infrastructure booms often lead to overinvestment, cutthroat competition, and disappointing stock returns. As the AI spending spree unfolds, investors must navigate this landscape with a discerning eye, balancing the immense transformative potential of AI with the risks tied to such aggressive capital deployment.

At Altman Advisors, we closely monitor this evolving landscape, carefully evaluating companies not only for their ability to leverage AI technology, but also for their discipline in capital spending. Our investment strategy emphasizes the importance of sound capital allocation, identifying companies that balance growth with long-term sustainability. We believe that while AI promises significant innovation, unchecked capital spending can lead to overcapacity, diminishing returns, and value erosion.  There are lessons from past infrastructure booms.

The current AI infrastructure boom closely mirrors previous capital expenditure cycles that reshaped economies in the past. Consider the railroad expansion of the late 19th century, where heavy investment in infrastructure ultimately led to an oversupply of assets, triggering fierce competition and financial turmoil for many companies. Similarly, during the late 1990s, telecom companies rushed to build fiber-optic networks, only to witness the bubble burst in the early 2000s. In both cases, companies that aggressively expanded infrastructure struggled to generate the returns necessary to justify the massive capital expenditures, and investors were left with suboptimal results.

At Altman Advisors, we take these lessons seriously, recognizing that the scale of the current AI investment boom exceeds previous historical peaks in similar instances, when adjusted for GDP. Large-cap tech companies are now dedicating as much as 35% of their revenues to AI-related capital expenditures, shifting from asset-light models to asset-heavy ones. Historically, businesses that rely on heavy capital spending often experience lower returns. As these companies invest more heavily in AI infrastructure, the risk of diminishing profitability grows, particularly as competition intensifies in the rapidly evolving AI landscape.

One of the core challenges facing companies in this environment is what we refer to as the "AI Prisoner’s Dilemma." In the race to dominate the AI space, firms fear falling behind if they don’t heavily invest in infrastructure. This competitive pressure results in an arms race, with each player overcommitting resources, potentially undermining profitability across the sector. This is reminiscent of the telecom boom of the late 1990s, where an oversupply of infrastructure diminished returns, even for the companies that succeeded technologically.

This is where Altman Advisors’ investment philosophy and positioning diverge from the crowd. We do not focus solely on the technological potential of AI; rather, we prioritize companies that are integrating AI into their existing operations in a way that enhances efficiency and drives innovation, without overburdening themselves with excessive capital expenditure. While AI infrastructure companies dominate headlines, we believe companies which are utilizing AI to optimize their business models are positioned to generate sustainable returns due to their structural exposure. These companies are incorporating AI to improve operations, streamline processes, and create value for shareholders, all while avoiding the pitfalls of over-investment in infrastructure.

When navigating the AI boom, Altman Advisors adopts a balanced and disciplined approach. We focus on companies that possess a mix of tangible and intangible assets, such as intellectual property, proprietary technologies, and strong operational efficiency. We believe these companies are more likely to outperform in the long run, as their growth is supported by smart capital deployment, rather than excessive spending on infrastructure. While it’s tempting to chase the latest AI infrastructure plays, our strategy is to focus on a value-oriented approach, carefully weighing capital intensity against long-term growth potential. This disciplined method helps us avoid overvalued companies with unsustainable capital expenditures and better positions us for stable, long-term returns.

As part of our security selection process, we take a comprehensive approach to investment decisions, carefully weighing valuation, capital deployment, and price momentum. We assess a company’s intrinsic value, ensuring that the price accurately reflects both tangible and intangible assets. Simultaneously, we evaluate management’s capital allocation decisions, prioritizing companies that deploy capital in a disciplined, strategic manner. We look for businesses that allocate resources efficiently, driving long-term growth without overextending their balance sheets. Finally, we consider price momentum as a gauge of market sentiment and investor confidence, but we remain vigilant not to chase short-term trends. By balancing these three critical factors—valuation, capital deployment, and price momentum—our goal is to build a portfolio that is poised for growth while remaining resilient to market volatility and delivering sustainable, long-term returns.

While the AI revolution promises to transform industries across the globe, investors must approach the AI infrastructure boom with caution. The history of infrastructure booms teaches us that aggressive capital spending often leads to overcapacity and poor stock returns. At Altman Advisors, we are also looking at companies that are using AI to drive innovation and operational improvements.  By applying a disciplined investment approach that considers valuation, capital allocation, and price momentum, we position our clients to benefit from the AI revolution while managing the risks associated with unchecked capital spending.  Please reach out for a more detailed conversation about how we screen our company holdings for capital deployment effectiveness.