RiverFront: Value in Hyperscalers, Chips and AI Infrastructure

RiverFront Investment Group published a note on June 30, authored by Adam Grossman, applying an “Intrinsic Value” framework to the AI trade. The note says technology-sector cash flows and productivity gains have risen since the release of ChatGPT in late 2022 and that earnings have accelerated across several hardware-linked segments.

The firm describes Intrinsic Value as a four-step process. First it assesses the macro backdrop, including interest rates, credit and fiscal policy. Next it evaluates competitive durability and capital allocation. Third it projects earnings and names evidence that would disprove the projection. Fourth it compares current valuations to those earnings scenarios to decide whether to add, hold, trim or exit positions.

RiverFront divides the AI market into five themes. The firm wrote that AI model providers and several recent high-profile listings have strong narratives but limited earnings histories, and that current prices imply multi-year or decade-long growth that the firm views as unlikely to be fully delivered in the near term. It warned these names can be sensitive to rapid sentiment shifts and significant downside if expected earnings do not materialize.

Hyperscalers and semiconductor companies are described as delivering revenue growth and repeatedly raising earnings guidance. RiverFront calls this area a “sweet spot” for stock pickers because earnings have been more durable there. The note also cautions that price gains have outpaced earnings for some firms, raising the importance of careful security selection and position sizing to manage volatility and potential multiple compression.

Companies that supply AI physical infrastructure — industrial components, power and cooling systems, and utilities supporting data centers — are identified as having a visible earnings case tied to hyperscaler demand. The note points to structural supply constraints that can support near-term pricing, and lists risks including a hyperscaler capex pullback, faster easing of supply bottlenecks, or regulatory limits on power consumption.

The note discusses established enterprise software vendors that the market has viewed as vulnerable to AI disruption. RiverFront reports that many incumbents are embedding AI into existing business models and that analyst estimates and company guidance have not shown a broad earnings slowdown. The firm said it will treat sustained earnings downgrades or repeated misses as signals to change its view.

RiverFront also covers early non-technology enterprise adopters in industrials, healthcare and consumer sectors. The firm notes these companies could see margin gains from AI-driven cost reductions or revenue increases, but that aggregate earnings data so far do not show broad margin expansion. The note adds that some layoffs attributed to AI may reflect post-COVID workforce adjustments.

The note states that Intrinsic Value is an ongoing assessment rather than a one-time screen and that macro factors influence both what companies can earn and the multiples investors pay. It advises that active managers will need to monitor earnings, valuations and macro conditions and adjust allocations accordingly. In the note Grossman wrote, “A theme can be fundamentally intact, and the stock can still have appreciated too much.”

The publication repeats standard investment cautions, noting that all securities carry the risk of loss, past performance does not guarantee future results, and diversification does not ensure a profit. RiverFront also discloses an affiliation with Robert W. Baird and says the commentary is not individualized investment advice.