AI profits strong but coming years will test market, Lonsec warns

Binaya Dahal

Editorial Intern, Financial Newswire

18 December 2025

While AI adoption is widespread and profits are strong at the top, risks are accumulating in the margins ahead of a crucial monetisation phase, Lonsec has warned.

As concerns over an AI bubble mount, the research house’s Global Equities Manager, Hong Hon said structural pressures are building even as upstream gains surge.

“While upstream cash flows today are indisputable, the risk of [a] bubble continues to gather downstream, especially if monetisation remains uneven, and depreciation and financing burdens weigh more heavily than modelled,” Hon said.

“In other words, we may be at the bubble’s edges with frothy valuations, rich multiples justified by extraordinary profits upstream and a capex cycle that must be justified over the next 2-3 years.

“While markets remain expensive during this transition period, positioning and risk control will matter.”

In recent months, concerns have intensified around the circular nature of financing and demand, as hyperscalers, AI startups and compute vendors enter arrangements that disrupt traditional notions of end‑user demand.

“Another emerging concern has been that many analysts now believe the useful lives for cutting‑edge GPUs may be 2-3 years rather than the 5-6 years assumed in many models, implying much higher depreciation charges,” Hon said.

“If correct, the added depreciation could become a drag on earnings and materially impact earnings quality and valuation multiples.”

While comparisons to the dot‑com boom are tempting, Hon said today’s market differs.

“There are segments of the market – unprofitable startups and long‑dated compute bets, that resemble dot‑com froth, where capital has been chasing optionality ahead of cash flows,” he said.

“Similar periods previously have been less about timing and more about unit economics: multiple contraction follows when capex outpaces monetisation, while premium valuations persist when earnings prove durable.”

Even though bullish managers highlight Nvidia’s strong performance as evidence that AI demand is structural, Hon said the picture remains mixed further down the supply chain.

“Some managers have witnessed some revenue uplift, while many are yet to see any measurable earnings impact despite anecdotal feedback of productivity benefits,” he said.

“This lag in monetisation raises the risk of overbuilding and valuation compression – a dynamic reminiscent of telecom capex during the dot‑com boom.”