There's a narrative floating around that the AI boom is all hype and no substance, that hyperscalers are pouring billions into data centers with little to show for it. But Dan Ives, partner and senior managing director at Yorkville Ives, isn't buying it. He argues that the heavy infrastructure spending by tech giants like Microsoft (MSFT) and NVIDIA (NVDA) is finally starting to show up in revenue, and that should ease some of the anxiety about whether all that capital expenditure will ever pay off.

AI Spending Starts to Translate Into Revenue

In a recent appearance on CNBC, Ives said demand remains "uniquely strong" across hyperscalers, AI cloud providers, and NVIDIA, while enterprises are beginning to turn their AI investments into commercial use cases. This shift matters because investors are increasingly demanding evidence that massive capital spending can generate sustainable revenue, not just buzz.

He pointed to Microsoft and NVIDIA as examples where continued double-digit capital expenditure growth could support broader tech sector expansion. But he also noted that enterprises first need to install and operate AI systems before they can develop and monetize more use cases, suggesting the adoption cycle is still in its early innings.

Ives continues to see strong semiconductor demand as AI infrastructure expands, but he acknowledged that high valuations can make stocks more sensitive to execution and growth expectations. In other words, the market is rewarding winners but punishing any misstep.

Software's AI Scare Is Overdone

One of the biggest fears among investors is that AI will cannibalize traditional software companies. Ives, however, pushes back on that notion. He said recent weakness in names like ServiceNow (NOW) reflects valuation and market concentration rather than an "execution problem," adding, "I don't see a software apocalypse."

Instead, he expects AI use cases across enterprise software, cybersecurity, and companies like Palantir Technologies (PLTR) to become clearer over the next six to 18 months. That's a timeline that suggests we're still early in the game, and the real payoff is yet to come.

More broadly, Ives estimates the industry is only "10 to 15% through the AI revolution," with technology investment increasingly spilling into areas like energy and industrial infrastructure. That's a lot of runway left, and it means the AI story is far from over.

China Remains Important to the AI Opportunity

On the geopolitical front, Ives highlighted Apple's (AAPL) use of Alibaba Group Holding (BABA) technology as part of its effort to strengthen its AI strategy in China. He sees this partnership as crucial to Apple's positioning in the Chinese market and believes the market is starting to recognize the company's broader AI strategy.

He also expects consumer AI hardware to create another source of demand as companies bring more AI capabilities to devices. That could be a significant tailwind for Apple and others in the consumer electronics space.

Investors Want Returns From the AI Financing Arms Race

Ives acknowledged that rising borrowing costs remain a consideration as hyperscalers and major tech companies increasingly combine cash flow, equity, and debt to fund AI infrastructure. But he characterized debt financing as relatively small compared with the size of the AI opportunity, noting that major tech companies generate substantial free cash flow.

For investors, the key issue is whether companies can show that capital spending translates into monetization. Ives described AI investment as an "arms race," arguing that companies risk losing ground if they pull back while competitors continue building infrastructure. In other words, the cost of not investing is potentially higher than the cost of investing.

Price Action: Microsoft shares were down 0.30% at $495.40 and NVIDIA shares were up 0.24% at $225.84 during premarket trading on Friday, according to market data.