Ben McMillan’s clients at IDX Advisors are increasingly worried about what could happen to their portfolios if the biggest spenders in the AI space suddenly decide to close their wallets.
It’s a reasonable fear. Spending from so-called hyperscalers like Amazon, Alphabet, and Microsoft on infrastructure like data centers has been a pillar of the AI trade that’s fueled the gains in the broader market. If investors start getting impatient waiting for spending to pay off, these firms could tighten their purse strings and suddenly siphon off the massive flow of profits for capex beneficiaries.
There’s no solid signal that this will happen anytime soon, with the top hyperscalers estimated to spend $920 billion in 2027, up from around $750 billion this year.
But things can change quickly in markets, and given the worries, McMillan’s clients asked him to screen for non-semiconductor stocks that could give them the best of both worlds. That is, companies that offer continued exposure to the AI trade in a non-pure-play way, while also not being over-reliant on the steady stream of hyperscaler capex.
“Everybody’s kind of taking profits in the chip space,” McMillan, IDX Advisor’s chief investment officer, said of his clients.
McMillan shared with Business Insider four S&P 1500 stocks that his screen produced.
This is a unique pick because Amazon is itself a hyperscaler. Yet, it also has other hyperscaler customers fueling its AWS cloud business.
The good news is that Amazon has many other business lines outside of AWS, McMillan said.
“AWS is just 18.0% of total revenue — the other 82% is retail, third-party seller services, advertising, and Prime subscriptions, which are tied to consumer spending, not enterprise capex cycles,” McMillan said in an email. “Even if AWS growth halves, ecommerce/ads keep the lights on.”
As Equinix is a data-center REIT, it’s naturally exposed to AI spending, but McMillan says the comapny’s more than 10,000 clients across multiple industries offer crucial diversification.
“A hyperscaler pause slows EQIX’s new-build pipeline and bookings momentum, but it doesn’t crater existing revenue,” he said. “This is ‘real estate landlord’ exposure, not ‘capex equipment supplier’ exposure.”
Eaton manufactures parts for the electrical grid, and while AI spending is giving that sector a boost right now, so is aerospace and government spending on grid updates, McMillan said.
“If hyperscaler orders crater, ETN loses the upside in Electrical Americas (where data-center orders were up ~240% YoY), but utility grid modernization, aerospace, and reshoring spend keep ~70%+ of the business growing,” he said.
This data-center REIT has more than 90% occupancy for its Americas data centers, and its existing leases are long-dated, which protects near-term cash flows, according to McMillan.
“Americas occupancy is 93.6%, and existing leases are long-dated — so near-term cash flows are protected,” he said.
