After a steep decline in AI-related stocks in 2025, Wells Fargo’s Christopher Harvey suggests infrastructure and service providers—the “picks and shovels” of the AI revolution—are becoming attractive once again. Here’s why investors may want to re-enter this growing sector.

YTD Drawdown Reveals Value

Harvey points out that many AI infrastructure stocks have significantly dropped this year, creating enticing entry points not seen since early 2024. With valuations resetting, the risk/reward ratio now leans favorably towards long-term investors:

• Stronger Fundamentals: Today’s AI expenditure is driven by profitable hyperscalers and enterprise users, unlike the dot-com era.
• Healthy Balance Sheets: Leading vendors of GPUs and servers maintain solid leverage ratios to navigate market fluctuations.

By tracking these metrics, investors can gain insights into profitability and efficiency ratios across the AI landscape.

Comparing AI with Traditional Tech Cycles

Harvey argues that the current market resembles the 2022 opportunity in communications service stocks—but AI’s distinct features set it apart:

1. Investment Loop: Expenditures from hyperscalers enable application innovation, which subsequently fuels demand for more hardware.
2. Strategic Importance: Policymakers consider AI crucial for competitive positioning, increasing budgetary commitments.
3. Faster Refresh Rates: Rapid advancements in AI technology mean shorter cycles compared to traditional IT refreshes.

Market Indicators

Increasing demand alongside constrained supply in the AI sector is indicated by recent earnings from hyperscalers:

• Microsoft: Anticipated record capex guidance.
• Meta: Plans for multi-year investments in AI infrastructure.

Keeping track of management reports will help shed light on AI budgets and investment strategies.

Limited Tariff Risks

Tariff concerns for AI supply chains appear minimal:

• USMCA-Compliant Goods: GPUs and servers imported from Mexico help mitigate tariff impacts.
• Geographic Diversification: AI manufacturers have relocated production to tariff-friendly regions.

Investment Considerations

• Entry Points: Look for pullbacks around historical support levels.
• Balance-Sheet Quality: Prioritize companies with low debt and strong cash flow yields.
• Capex Visibility: Focus on firms with multi-year contracts from cloud leaders.

Given attractive valuations and persistent demand, Harvey believes the AI picks and shovels strategy presents a durable path for defensive growth.