💰 Megacap Capex Bonanza 

👻 …But what about returns on invested capital?

👀 Where to look for opportunities

In this week’s Tech Edge, we highlight our key takeaways from the Megacaps’ earnings reports and explore the implications for the rest of the value chain. 

💰 Megacap Capex Bonanza  Outsized increase in Capex was the biggest takeaway from this earnings season. Going into this year, investors were expecting ~20% growth in capex after gangbuster spending in 2024, but there are no signs of slowing down. In fact, every Megacap that reported earnings guided to significantly higher spending with total capex now tracking closer to 40%+ growth this year. Meta guided to $60-65B, a significant step-up from $39B in ’24 and a consensus of $53B.Microsoft guided to $80B, growing 42%yoy.Google is planning to spend $75B, exceeding expectations of $58B. Amazon spending “well over $100B”😮
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👻…but what about return on invested capital All 4 Big Tech companies stepped up their capex, but not all surprised meaningfully to the upside in earnings, raising questions about the returns on invested capital.  Only Meta beat revenues by 3% and provided a solid guide. The rest came in line to slightly lower. AWS and Azure flagged supply constraints, Google is working hard to keep up with the competition.  Here are some highlights from the earnings reports: Meta – reported revenue growth of 21%yoy and a strong guide, beating estimates by 2.9%. 

Microsoft – Azure growth and guide disappointed; while impressive at 31%/31-32% Guide, both came short of expectations by 1-3%. The company blamed it on execution, but with incremental spending, investors are expecting incremental upside surprises.

Google – big capex surprise accompanied by revenue miss didn’t impress investors. Intensifying competition may mean that Google has to keep spending just to maintain current growth estimates. 

Amazon – AWS delivered 18.9% yoy sales growth in Q4, slightly lower than consensus, with management flagging supply constraints in the quarter that would likely remain until 2H 25. The bottom line is that the Megacaps delivered solid returns on invested capital in the prior cycle, but it is still TBD whether they can deliver the same in the next tech cycle with this level of capex spending.  The stocks performed well last year as they have defensive characteristics, but for the stocks to work from here, we would need to see big beats and raises, which may be hard to deliver. Who is better positioned to benefit?    
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👀 Where to look for opportunities With technologies developing at a very rapid pace, there are several new entrants that offer more flexible solutions compared to the cloud service providers that we expect will gain significant market share. One of those examples is Cloudflare, which reported blowout earnings today. The company offers a unique infrastructure that is particularly attractive to newer tech entrants as it’s significantly more flexible and solves critical issues that tech companies are facing.  Companies developing new AI applications generally have to over-provision hardware as they don’t have the ability to predict surges in demand. According to Cloudflare, current utilizations on competing platforms are in the single digit %. What Cloudflare does differently is that the company can route traffic more efficiently and run utilizations in the 70%s. This way customers only pay for what they use rather than what they have provisioned.  Cloudflare Developer Services, which provides access to hardware and models, represents only a small portion of the company’s revenue today. We expect that in the long run, Cloudflare can be a go-to platform that rivals the hyperscalers in size. 
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This is just one example of a new entrant that is gaining significant share with innovative solutions. But this spending surge is going to create big winners across all categories. Hardware and Data Infrastructure are two of the best positioned areas in the value chain. 
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