Bill Ackman bets Big Tech's AI spending will pay off

Bill Ackman, the billionaire who runs Pershing Square Capital Management, says the market is too gloomy about Big Tech's AI spending. In a quarterly letter shared November 2, he argued that the biggest spenders will earn more than analysts expect. His firm holds stakes in Microsoft, Meta and Amazon, so he has money riding on that view.

What Ackman said

The companies he means are often called hyperscalers. These are the giant cloud and AI firms building huge data centers. The money they spend on that equipment and construction is called capex. Ackman wrote that analyst estimates punish these firms for today's costs while giving little credit for the revenue and profit that spending is likely to bring later.

He put a number on it. Ackman estimated that hyperscalers could earn a pre-tax return of 15% to 25% on the money they invest. That means the profit made on each dollar put into the business, before taxes. He called those assumptions conservative and said the real returns could be much higher.

Two paths, one result

Ackman laid out two scenarios. In the first, revenue growth beats analyst estimates over the next several years, which he called highly probable. In the second, it does not, and the companies cut their spending. In either case, he wrote, they will spend less relative to their size and bring in more free cash flow than current estimates imply. Free cash flow is the cash left after paying for the business.

Why the worry now

The letter arrives during a shaky stretch. Big Tech firms have mostly reported strong third-quarter earnings. Still, investors are watching closely for proof that heavy AI spending brings returns. Since an early October peak, the sell-off has pushed the Nasdaq 100 toward correction territory and erased about $2 trillion from the index.

Ackman also noted that the so-called picks-and-shovel trade has beaten the hyperscalers this year. That refers to companies that sell the tools and equipment for the AI buildout.

Debt is not the same problem

Ackman said investors should not lump hyperscalers in with neoclouds. Those are cloud providers that serve AI customers, and they have faced funding and debt concerns. He said the hyperscalers are in a far stronger position, with virtually no net debt. They can pay for most of their spending from the cash their core businesses produce.

What is not known

This is one investor's forecast, and he owns shares in some of the companies involved. Nobody yet knows whether revenue will grow as he expects. For anyone with stock funds, savings are tied to how this plays out. Expect bumpy prices while investors wait for proof.