Semiconductors are caught in a selloff UBS thinks is overblown.
The bank argues that fears over "circular financing" in AI infrastructure deals misread who's actually cashing in on the buildout, and it's the chip supply chain, not the hyperscalers, footing the bill.
The commentary follows a wave of investor inquiries about data center deals from Nvidia Corp (NASDAQ:NVDA, XETRA:NVD) and Advanced Micro Devices Inc (NASDAQ:AMD, XETRA:AMD). Recent media reports indicated Nvidia is backing up to $50 billion in lease agreements for a Hut 8 site in Texas and is working on deals worth $750 billion in total, including a $250 billion arrangement with OpenAI, according to Bloomberg. AMD, together with an undisclosed neocloud partner, signed a deal with Core Scientific for up to 2.5 gigawatts of capacity, starting with 500 megawatts in 2027.
UBS identified four drivers behind the recent correction: concerns about open source models weighing on frontier model providers' growth, questions about the memory cycle's sustainability, perceived "circular" financing arrangements, and crowded investor positioning in semis.
The bank pushed back on the first three. It sees the rise of open source models as a net positive for Nvidia, pointing to Artificial Analysis data showing new open models sit between prior and current-generation frontier offerings. It also maintained its view that NAND pricing will roll over in late calendar 2027 and DRAM in mid-2028, with nothing so far to change that call.
On financing, UBS disputed Street estimates that free cash flow for Amazon, Google, Meta and Microsoft will fall below $100 billion in 2027. The bank's own hyperscaler capex projection of roughly $1.4 trillion for that year implies the four companies' combined free cash flow would instead be slightly negative, around negative $60 billion including Oracle. That gap is largely due to rising memory prices, which UBS said are set to require about $550 billion in incremental capex between 2026 and 2027, nearly the entire projected year-over-year increase for that period.
Against that backdrop, UBS estimates Nvidia will generate approximately $900 billion in free cash flow through the end of 2028, with Micron Technology Inc (NASDAQ:MU) generating about $450 billion and AMD about $90 billion, all within its US coverage universe. In UBS's view, the supply chain is generating all of the cash, which the bank says makes sense.
That dynamic, UBS argued, explains why cash-generating suppliers are helping underwrite the buildout, and suggested Nvidia may be shifting toward a more vertically integrated model.
The bank also said hyperscalers' capex increases largely reflect higher memory prices rather than added compute, meaning supply and demand for compute itself has tightened further.
As memory prices normalize, UBS expects hyperscaler spending to ease and free cash flow to improve, a trend it views as ultimately positive for the AI trade despite any near-term drag on semis.