Let's Talk About Capex
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This week, we released a podcast with the Wall Street Wildlife guys (check out their podcast, it is fun!) updating Nvidia. Wall Street Wildlife co-host Luke Hallard came on the show in 2022 and pitched Nvidia as an AI play before it was cool. The stock is up around 600% since the episode aired. Not bad.
We had a nice discussion about Nvidia’s culture of innovation, moat, and business prospects. Go listen to the episode for a delightful conversation.
Can we talk about capital expenditures now?
Meta, Microsoft, Alphabet, and Amazon (MAMA?) all reported earnings this week. These are the four horsemen of the artificial intelligence (AI) spending bonanza, and boy did they come through with 2025 guidance. I don’t think Nvidia or TSMC are going to have trouble growing this year.
Meta Platforms guided for $65 billion in capital expenditures.
Alphabet guided for $75 billion.
Microsoft guided for $80 billion.
Amazon guided for $100 billion (mainly related to AWS, but let’s say $20 billion goes to e-commerce).
Combined, it looks like MAMA is going to spend $300 billion on capital expenditures related to data centers/cloud/AI in a single calendar year.
A single calendar year!
Let me give you some context on how insane this is. In 2023 (just two years ago) these four companies spent $140 billion on capital expenditures. They are going to more than double this figure two years later.
From 2011 - 2020, these four companies spent a cumulative $379 billion in capital expenditures. They are going to come close to replicating this spending in 2025 alone.
Call me crazy, but I am skeptical that a high ROIC will show up. Eventually, it has to come through in more profits for the cloud end customers (or internal solutions at Meta/Alphabet). $50 billion in new earnings on $300 billion is around a 17% ROIC. Are you certain $50 billion in profits will show up?
Perhaps it will. But it is not a bet I feel comfortable making. The risk/reward is all screwed up with these stocks while they trade at 30x and 40x earnings.
As Mostly Borrowed Ideas recently wrote, big tech’s earnings quality is deteriorating. I don’t know if I would be a seller of big tech stocks right now (I do not hold any today), but the uncertainty around this monstrous spending will keep me from being a buyer.
-Brett
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