Wedgewood Partners says hyperscalers and semis have diverged as investors price in a hardware glut. The $5B firm trimmed chip exposure and added software names that sell into AI buildout.
Wedgewood Partners used its second-quarter letter to call out a growing split in the AI trade. Hyperscaler stocks kept climbing through Q2 as capital-expenditure plans stayed aggressive. Semiconductor stocks stalled. The reason, the firm wrote, is that investors started pricing in a hardware capacity glut before the software and services layer proved it could monetize the installed base.
“The market is now asking whether all those GPUs will generate the returns the capex cycle implies,” the letter said. Wedgewood, which manages about $5 billion, pointed to hyperscaler earnings calls where management teams flagged longer payback periods on AI infrastructure. That marked a shift from the immediate-ROI tone of 2024.
The firm’s Q1 13-F showed large positions in Microsoft, Amazon, and Alphabet on the hyperscaler side. It held a smaller allocation to NVIDIA relative to the benchmark. Wedgewood said it trimmed some semiconductor exposure in the quarter and added to select software names that sell into the AI buildout. The logic: if the hardware glut materializes, the next wave of value will come from the software that makes the GPUs useful.
The valuation gap between the two groups has widened to levels last seen in late 2022, just before the last AI-driven rally began. Wedgewood said the current setup rewards stock-picking over sector-wide bets.
“The easy money from owning everything AI-adjacent is behind us,” the letter concluded. “The next phase rewards specificity.”
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