These analysts expect a widespread AI sell-off. Here are the long and short trades they suggest

The boom-bust cycle that recently dragged down cryptocurrencies and precious metals is coming for AI stocks, according to BCA Research. And they have an idea of ​​how to play it.

BCA analysts this week recommended buying into Korean and Taiwanese chipmakers while selling the US giants – tech giants Microsoft (MSFT), Alphabet (GOOG), Amazon (AMZN), Meta (META), and Oracle (ORCL) – who expect their massive investments in artificial intelligence to eventually weigh on stock prices.

“Capital spending booms rarely end well for investors,” the analysts wrote. “Distributing large sums of money quickly often leads to poor capital allocation.”

The five super companies are expected to invest more than $400 billion in infrastructure this year, with much of that used to build data centers and outfit them with the most advanced chips and servers. At times, investors had difficulty digesting the scale of those investments, but concerns about overspending did not prevent stocks from rising.

BCA analysts argue that this spending spree is a departure from the investment discipline that has been key to the success of big technology companies over the past decade. They expect that misallocation of capital will inevitably lead to lower returns for companies with large expansion on equity, which “will lead to lower multiples for their stocks even if their earnings growth remains positive.”

Another cause for concern, according to the BCA, is the risk that existing data centers will become obsolete in a short time. BCA expects data centers to become less expensive to build in the coming years as expertise increases efficiency. In addition, as more computing power comes online, the value of existing capacity should decline.

“The price of ‘computing’ will fall dramatically,” BCA says. This may be useful for consumers, but not for hyperscalers who effectively rent out computing power to cloud customers.

Any sign that AI investments are not paying off as expected could spell trouble for ultracap stocks. Meanwhile, BCA expects Asian semiconductor manufacturers to continue to benefit from strong data center investment without the excess supply and capital headwinds faced by super-expanders. They also point out that these chipmakers’ valuations remain reasonable despite their shares rising this year. In their memo, they named Taiwan Semiconductor Manufacturing (TSM), along with SK Hynix and Samsung, which mainly trade overseas.

BCA expects its two-pronged trade to succeed over the next 12 months regardless of whether the AI ​​rally continues or falters. Even if the bottom falls out of the AI ​​trade and both supercaps and Asian chipmakers decline over the next year, they expect supercaps to perform worse, making a short trade more profitable than an unprofitable long buy on chipmakers.