"Analysts use discounted cash flow models to value companies. These models rely heavily on future cash flows and a "terminal value" which is how much the business is worth beyond the forecast period. For big tech companies investing big money into AI, that terminal number can look great, because they stand to benefit from their investments in the technology longer term."
"What they're saying: Meta also has a leg up because it is not a software company. Investor sentiment on software is "negative" to the point of the sector being "extremely radioactive," Anurag Rana, senior analyst with Bloomberg Intelligence, tells Axios. Wall Street has software in the doghouse over concerns that with the explosion of Claude Code, software will be obsolete. The math behind what it takes to value a company completely breaks in a world where AI can replace software entirely."
Microsoft reported solid earnings with revenue and profit beating expectations, yet its stock fell nearly 12%. Cloud revenue rose 39% year-over-year but mainly from non-AI workloads. Capital expenditures reached $37 billion for the quarter, a 65% increase. That spending mismatch raises concern when investments are not clearly tied to revenue-generating AI. Meta also beat on earnings and its stock rose despite outlining over $115 billion in planned AI spending because investors expect AI to drive ad growth. Analysts value firms with discounted cash flow models that emphasize future cash flows and terminal value. Software faces investor skepticism that AI could replace software and undermine valuation math.
Read at Axios
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