Time to Revisit the AI “Picks & Shovels” Trade

After a steep pullback in AI-related equities so far in 2025, Wells Fargo's Christopher Harvey argues that infrastructure and service providers—the “picks & shovels” of the AI revolution—are once again attractive. Here's why investors may want to reenter this durable supercycle.

YTD Drawdown Uncovers Compelling Value

Harvey highlights that many AI-infrastructure names have been sold down sharply this year, creating entry points not seen since early 2024. With valuations resetting, the risk/reward profile now tilts in favor of long-term holders:

• Stronger Fundamentals: Unlike the dot-com era, today's AI capex is driven by profitable, cash-generating hyperscalers and enterprise adopters.

• Balanced Sheets: Leading providers of GPUs, servers and networking gear maintain healthy leverage ratios, smoothing through market volatility.

To monitor these evolving balance-sheet metrics and margin trends across the AI ecosystem, analysts often consult the Ratios TTM Statement Analysis API, which delivers up-to-the-minute profitability and efficiency ratios.

Durable AI Supercycle vs. Traditional Tech Cycles

Harvey compares the current environment to the 2022 opportunity in communication services stocks—where long-term secular growth trumped near-term headwinds. Key distinctions for AI today include:

1. Symbiotic Investment Loop: Infrastructure spend by hyperscalers drives application innovation, which in turn fuels more hardware capex.

2. National Strategic Importance: Policymakers view AI as critical for competitiveness, making budgets less elastic even in downturns.

3. Faster Refresh Cadence: AI models and hardware generations cycle on a 12-18 month cadence, accelerating demand versus legacy IT refreshes.

Earnings & Capex Signals

Recent results from hyperscalers underscore the imbalance between soaring AI demand and constrained supply:

• Microsoft's Q2 Earnings featured record server-farm capex guidance.

• Meta's Spending Plans call for multi-year investments in AI training clusters.

Investors tracking management commentary on AI budgets and capex pacing should reference the Earnings Transcripts API for exact quotes and forward-looking remarks.

Tariff Concerns Remain Limited

Harvey downplays tariff risk for AI supply chains:

• USMCA-Compliant Goods: GPUs and finished servers imported from Mexico, which supplies two-thirds of U.S. server imports.

• Geographic Diversification: Manufacturers have shifted fabrication to tariff-friendly locations, mitigating sudden cost shocks.

Investing Considerations

• Entry Points: Look for pullbacks toward long-term moving averages—historically strong support zones during tech cycles.

• Balance-Sheet Quality: Favor firms with ≤2× net debt/EBITDA and healthy free cash flow yield.

• Capex Visibility: Prioritize names with clear multi-year contracts from cloud leaders.

With valuations more attractive and demand still outstripping supply, Harvey believes the AI picks & shovels strategy offers a durable, defensive growth angle—one that's less exposed to cyclical downturns and tariff shocks than asset-light software names.