Key Points
- While the macroeconomic backdrop is clouded by war, the microeconomic landscape of the technology sector is being reshaped by aggressive private financing.
- The massive buildup of data centres in the US is currently facing significant structural headwinds that are poised to delay a large portion of the 2026 pipeline.
- For decades, technology giants have dominated through highly profitable, asset-light models built on software, digital platforms, and intellectual property. However, the current AI supercycle has shifted the centre of gravity from intangible assets to hard infrastructure.
- Incorporating a higher risk-free rate assumption of 4.6%, along with an additional discount to reflect the evolving business model, we have revised our fair P/E down to 25x.
- The outbreak of the 2026 US-Iran war on 28 February has introduced a systemic shock to global supply chains, reminiscent of past energy disruptions. The most immediate implication is higher inflation expectations.
- After incorporating a lower fair P/E, we continue to see meaningful upside potential. Given the uncertainty in the Middle East, we recommend adopting strategies such as Dollar Cost Averaging (DCA) or a Regular Savings Plan (RSP) to smooth the volatility. As such, we reiterate our 3.5 Stars - Very Attractive View on the Digital Economy (Internet) sector.
1) Macroeconomic risks:
Macroeconomic Pressure: Geopolitical conflict and renewed inflationary risk
The outbreak of the 2026 US-Iran war on 28 February has introduced a systemic shock to global supply chains, reminiscent of past energy disruptions. The conflict, compounded by the closure of the Strait of Hormuz on 4 March, has led to what the International Energy Agency describes as the largest supply disruption in the history of the global oil market.
The immediate impact on energy prices has been severe. Brent crude oil surged above USD120 per barrel following the maritime blockade, prompting major energy exporters such as QatarEnergy to declare force majeure on all liquefied natural gas (LNG) exports.
The most immediate implication is higher inflation expectations. US 10-year Treasury yields have risen by close to 50bps since the onset of the war, reaching 4.4%, while shorter-tenor yields have climbed more than 60bps to above 4%—their highest level since August 2025.
The rise in risk-free rates, coupled with an increase in the equity risk premium (ERP), has materially reduced the present value of terminal cash flows—an especially important component in the valuation of high-growth technology firms. This dynamic has driven the recent valuation reset, particularly among crowded mega-cap AI names that had been priced for a lower interest rate environment.
2) Private Market Risk
Private-market funding risk: more aggressive funding, higher execution pressure
While the macroeconomic backdrop is clouded by war, the microeconomic landscape of the technology sector is being reshaped by aggressive private financing. OpenAI’s recent proposal offering a guaranteed 17.5% minimum return to private equity (PE) firms marks a significant shift in how AI development may be financed and distributed. By seeking USD4 billion in capital for a joint venture valued at approximately USD10 billion, OpenAI is leveraging the balance sheets of firms such as TPG, Advent International, and Bain Capital to establish what it terms a “captive channel” for enterprise distribution.
Potential Upside: PE firms collectively control hundreds of operating companies across sectors such as healthcare, manufacturing, and financial services. A joint venture structure effectively converts these portfolio companies into a direct distribution channel for OpenAI’s enterprise products.
Key Downside: The guaranteed return shifts financial risk directly onto OpenAI. If the venture underperforms, OpenAI remains obligated to meet the 17.5% return, potentially compressing margins or necessitating further dilutive fundraising. This is particularly relevant given that OpenAI is still widely seen as operating at a loss, with estimates suggesting profitability may not be achieved until 2030, and with potential solvency risks by 2027 should it fail to meet its substantial commercial and infrastructure commitments to Microsoft and other partners.
This comes amid a rapid erosion of market share. OpenAI’s ChatGPT share has declined as competitors gain ground—Google’s Gemini has increased its share from 14.7% in January 2025 to 25.2% in January 2026, while ChatGPT’s share has fallen from 69.1% to 45.3%. Given OpenAI’s scale, execution missteps could have broader spillover effects across AI pricing, competitive intensity, and investor sentiment towards the sector.
Table 1: Feature of OpenAI JV
|
Feature of OpenAI JV |
Detail / Value |
|
Capital Sought from PE |
USD 4 Billion |
|
Guaranteed Minimum Return |
17.5% |
|
Anchor Investor |
TPG |
|
Strategic Sweetener |
Early access to unreleased models |
|
Underlying Valuation (Feb 2026) |
$110 Billion - $120 Billion |
Figure 1: OpenAI losing market share
Source: apptopia
3) Capacity constraint risks
The massive buildup of data centres in the US is currently facing significant structural headwinds that are poised to delay a large portion of the 2026 pipeline. Recent industry reports and market data suggest that while the "announced" capacity is record-breaking, the "executable" capacity is more constrained.
Of the approximately 16 GW of capacity scheduled to come online in 2026, only about 5 GW was physically under construction as of late Q1 2026. The remaining 11 GW remains in earlier-stage pre-production phases. Given current pace, 30–50% of the capacity slated for 2026 could end up being delayed.
Another important bottleneck is the shortage of electrical equipment, such as transformers, switchgear and batteries. They are needed not just to power AI, but also to build out the grid that is seeing increased consumption from electric cars and heat pumps. US manufacturing capacity for these devices cannot keep up with demand, and the scarcity has caused data centre builders to rely on imports.
The implication is not that AI demand is weakening, but that deployment and monetisation may be paced more slowly than the market had previously assumed.
Read More: Energy could be the ultimate frontier for AI
Figure 2: Half of the pipeline could end up being delayed
Source: Company announcements
4) Shift in business structure
A shift from asset-light to infrastructure-heavy business models
For decades, technology giants have dominated through highly profitable, asset-light models built on software, digital platforms, and intellectual property. However, the current AI supercycle has shifted the centre of gravity from intangible assets to hard infrastructure.
Average 12m trailing CAPEX to Sales for the top hyperscalers (Alphabet, Microsoft, Amazon.com, Meta, Oracle) is 36%, ranking similar to heavy asset sectors like electric utilities, Independent Power and Renewable Electricity Producers, metals & mining, along with an average NCA-to-Sales of 1.53x.
This transition implies that a larger share of operating cash flow must be reinvested in capex simply to sustain competitive capacity. Higher capital intensity typically results in lower returns on invested capital (ROIC), as firms must reinvest a larger share of profits to maintain growth. Lower free cash flow and uncertain ROIC have clouded the path to recovery. Consequently, less free cash flow remains available for dividends, deleveraging, or share buybacks—which, in our view, justifies a lower valuation multiple than in the earlier phase of the AI re-rating.
Table 1: Sectors
|
Sectors/ Industries |
T12M CAPEX/Sales |
NCA/T12M Sales |
|
Hyperscalers |
36% |
1.53x |
|
Multi-Utilities |
46% |
4.74x |
|
Electric Utilities |
42% |
4.72x |
|
Industrial REITs |
42% |
- |
|
Metals & Mining |
29% |
2.20x |
|
Source: Bloomberg Finance L.P., iFAST compilations. Data as of 31 March 2026. |
||
Adjusting fair P/E lower to reflect the abovementioned risks
Our previous fair P/E for the digital economy (internet) sector stood at 30x. Given the structural shift towards capital-intensive, infrastructure-heavy business models, alongside a base case of “higher-for-longer” inflation, a downward revision is warranted.
Incorporating a higher risk-free rate assumption of 4.6%, along with an additional discount to reflect the evolving business model, we have revised our fair P/E down to 25x.
Thus, this reflects not only a higher discount-rate environment, but also a lower premium for growth that is becoming more capital-intensive and physically constrained.
Structural Tailwinds persist: AI demand surging, earnings momentum intact
AI adoption rates have been accelerating rapidly, with tokens processed growing at double-digit rates, driving robust demand for cloud computing. Hyperscalers have announced substantial capex expansion plans this year. Recent reports indicate that Microsoft has agreed to lease a data centre project in Texas (with a capacity of 700 megawatts) that was originally being developed for Oracle and OpenAI, but was abandoned earlier in the month due to financing constraints and changing requirements from OpenAI. Microsoft’s decision to proceed amid heightened geopolitical uncertainty in the Middle East underscores the resilience of demand for cloud computing.
Earnings momentum remains on an upward trajectory, with consensus estimates continuing to be revised upwards despite share prices declining by nearly 25% from their peak. We project that the splurging demand for AI could offset current macro headwinds.
Attractive upside potential still – Target Price: USD 66
In summary, downside risks for the sector have increased. The structural shift towards infrastructure-heavy operations is likely to compress valuation multiples, as business models become less capital-efficient and more constrained by physical capacity.
However, long-term AI-driven earnings growth remains intact, with hyperscalers as the primary beneficiaries. While the software sector has experienced earnings downgrades in recent months, share prices have declined at a much faster pace than revisions to earnings.
After incorporating a lower fair P/E, we continue to see meaningful upside potential. Based on projected conservative earnings growth of 8.6% in FY26, 12% in FY27, and 10.3% in FY28, we estimate upside potential of close to 34% from current levels. In other words, near-term risks have risen, but the derating now appears to discount a meaningful portion of those risks.
Given the uncertainty in the Middle East, we recommend adopting strategies such as Dollar Cost Averaging (DCA) or a Regular Savings Plan (RSP) to smooth the volatility.
Table 2: Valuation
|
Invesco NASDAQ CTA Internet |
FY25 |
FY26E |
FY27E |
FY28E |
|
PE Ratio (X) |
27.2 |
20.8 |
18.6 |
16.8 |
|
Earnings Growth (YoY%) |
25.4% |
8.6% |
12.0% |
10.3% |
|
Earnings Per Share |
61.41 |
66.72 |
74.76 |
82.47 |
|
Dividend Yield (%) |
0.34% |
0.49% |
0.55% |
2.36% |
|
Target Price (USD) Based on 25X fair P/E ratio |
|
|
|
65.6 |
|
Upside Potential (%) |
|
|
|
34% |
|
Source: Bloomberg Finance L.P., iFAST Estimates. Data as of 16 April 2026. |
||||
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.
All materials and contents found in this site are strictly for general circulation and informational purposes only and should not be considered as an offer, or solicitation, to deal in any of the funds or products found/identified in this site. While iFAST Financial Pte Ltd ("IFPL") has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies and typographical errors. Any opinion or estimate contained in this report is made on a general basis and neither IFPL nor any of its servants or agents have given any consideration to nor have they or any of them made any investigation of the investment objective, financial situation or particular need of any user or reader, any specific person or group of persons. You should consider carefully if the products you are going to purchase are suitable for your investment objective, investment experience, risk tolerance and other personal circumstances. If you are uncertain about the suitability of the investment product, please seek advice from a financial adviser, before making a decision to purchase the investment product. Past performance is not indicative of future performance. The value of the investment products and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. In respect of any matters arising from, or in connection with the said research analyses or research reports, recipients of the report are to contact IFPL at 10 Collyer Quay, #26-01 Ocean Financial Centre Building, Singapore 049315, or by telephone at +65 6557 2853. Where the report contains research analyses or research reports from a foreign research house and if the recipient of such research analyses or research reports is not an accredited investor, expert investor, institutional investor or an ex-accredited investor, IFPL accepts legal responsibility for the contents of such analyses or reports to such persons only to the extent as required by law. Please note that only certain security(ies) herein are available to all investors, while the rest are only available for certain persons to invest in, such as Accredited Investors (as defined in the Securities and Futures Act) or one who invests at least S$200,000 (or its equivalent currency) per transaction. To qualify as an Accredited Investor, one needs to submit a declaration form and certain relevant supporting documents, according to iFAST’s prevailing policies and procedures.
Please read our full disclaimers on the website at ( https://secure.fundsupermart.com/fsmone/policies/328125/investment-account-terms-&-conditions).
iFAST Financial Pte Ltd (IFPL) (registered address: 10 Collyer Quay #26-01 Ocean Financial Centre Singapore 049315, Telephone: 6557 2000) holds the Financial Advisers Licence issued by the Monetary Authority of Singapore ('MAS') to conduct regulated activities of advising on securities, marketing of collective investment schemes and arranging of any contract of insurance in respect of life policies, other than a contract of reinsurance and the Capital Markets Services Licence issued by the MAS to conduct regulated activities of dealing in securities and providing custodial services for securities. While IFPL has made every effort to ensure the independence of the report's contents, IFPL's nature of business is such that IFPL and its connected and associated entities together with their respective directors, officers and staff may be involved in providing dealing or investment-related services in the abovementioned securities, and have taken or may take positions in the securities mentioned in this report, and may also act as the principal for any buy or sell trades.