AI remains a powerful investment theme. But the amount of money being poured into data centres is prompting a harder question: which businesses can turn that investment into returns for shareholders?

In this week’s ASX Stock Pulse, Richard Hemming looks at the pressures facing NEXTDC (ASX: NXT), why Macquarie Technology Group (ASX: MAQ) remains our preferred exposure in the sector, and what weaker trading means for Nick Scali (ASX: NCK).

The common thread is our focus on balance sheets, cash flow and the price you pay. Read more on our favourite AI Small Cap stocks.

Central banks and technology earnings in focus

The US Federal Reserve and European Central Bank meet this week, while Microsoft and Alphabet report quarterly earnings. 

For investors watching AI, those results are an opportunity to assess the relationship between spending on infrastructure and the earnings it can generate.

The recent bond rally also points to a more cautious mood. Investors are becoming less forgiving when operational uncertainty meets a heavy funding burden.

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NEXTDC puts AI infrastructure under scrutiny

NEXTDC, which we do not cover, fell almost 42% in a single trading session last week.

The sell-off highlights the risks involved in building expensive infrastructure. Strong demand alone does not remove the challenges of securing power, completing projects and turning capacity into cash flow.

When substantial spending comes ahead of revenue, delays can have a significant impact on investor expectations.

The question is becoming more pressing across the AI sector: are investors backing businesses that can deliver?

Why Macquarie Technology remains on our radar

Macquarie Technology has also faced share price pressure. Even so, it remains our preferred exposure in this sector.

Richard highlights the company’s planned expansion, which he expects to roughly triple data centre capacity over the next few years. His investment case centres on funding for the current development program and the cash flow supporting the business.

That distinction matters. Investors need to consider what is funded today, how capacity will come online and when it can begin generating returns.

Richard will interview CEO David Tudehope in the coming weeks to explore the opportunity and the company’s progress. Watch out for that discussion.

For more on our approach, read our series, Hunting for value with AI potential.

Nick Scali feels the pressure on discretionary spending

Retail is the other sector in the spotlight.

As housing momentum slows and household budgets remain under pressure, consumers have less appetite for big purchases. A Nick Scali sofa is a want, rather than an essential expense.

Nick Scali’s first-quarter update showed written sales orders in Australia and New Zealand down 15% on the prior corresponding period, with store traffic approximately 10% lower. 

Those figures show the pressure on the domestic business. We will cover the update in this week’s small cap research report.

Looking beyond the retail downturn

Our longer-term view on Nick Scali remains positive. See our top performing stocks.

We are watching for a domestic recovery that we believe may not be fully reflected in the share price. There are also encouraging signs that the UK business is gaining traction.

For patient investors, dividends remain part of the investment case while the business works through a difficult trading period.

Balance sheets and cash flow matter

Whether you are assessing AI infrastructure or furniture retailing, growth expectations need financial support.

We continue to focus on balance sheet strength, cash flow and valuation. Those fundamentals matter when markets become less willing to overlook execution risk.

Watch this week’s video for Richard’s full view on NEXTDC, Macquarie Technology and Nick Scali.