Why the Huge Capex in the Big Tech Companies is not an Issue (for Now)
A 40% increase is expected in 2025, bringing the total to more than $300B
The world’s major tech companies have finished publishing their earnings. Despite stellar results, rising profits, and strong outlooks, the market chose to focus on one thing: the massive increase in CAPEX, leading to a period of consolidation.
This surge in spending is significant: Microsoft, Alphabet, Amazon, and Meta are expected to invest a staggering $300B. But is this really a bad thing? In this analysis, I will explain why I see it as largely positive while also exploring alternative scenarios in case I am wrong.
What are these CAPEX investments for?
The massive capital CAPEX recently announced by Microsoft, Alphabet, Amazon, and Meta are primarily aimed at expanding their Cloud and AI capabilities and the supporting infrastructure. Here is a breakdown of where these investments are going.
AI Infrastructure Development
Data Centers. A significant portion of spending is directed toward building and expanding data centers to support the immense computational demands of AI. Large language models and generative AI require vast amounts of processing power, making data center expansion a top priority
Hardware Acquisition. Companies are heavily investing in high-performance AI chips (such as NVidia’s GPUs) to train and run sophisticated AI models. The AI boom has created a surge in demand for these chips, prompting firms to secure long-term supply
Cloud Services Expansion
As AI adoption grows, so does the demand for cloud computing. Amazon Web Services (AWS), Microsoft Azure, and Google Cloud are scaling up their infrastructure to handle AI workloads
This investment goes beyond physical expansion, companies are also working to enhance efficiency and optimize AI-powered cloud services
Cloud was already a strong trend before AI increased the demand
Energy Solutions
The expansion of data centers comes with massive energy demands. To address cost and environmental concerns, companies are investing in renewable energy sources and energy-efficient technologies to power their AI infrastructure
If you are curious about the link between energy and AI, you can read this article
Other elements
CAPEX is also required for other strategic initiatives within these major tech companies
For example, Alphabet is rapidly investing in Waymo, acquiring new autonomous vehicles to expand its capabilities and scale its services into new cities
Key concerns for the market
The market's reaction stems from several key concerns. Investors are questioning when, or if, these companies will generate significant returns from their massive AI investments. While spending is at record levels, direct revenue from AI services has yet to justify the scale of these expenditures.
Additionally, uncertainty in the AI market raises the risk of overbuilding. Companies are making aggressive infrastructure bets based on current demand trends, but if AI adoption slows or efficiency improves faster than expected, they could end up with underutilized assets.
The recent DeepSeek AI breakthrough has further fueled doubts. If AI models become significantly more efficient, these heavy capital investments may prove excessive. History has shown that tech investment cycles often overestimate long-term returns, leading to caution among investors.
Finally, it is possible that the market is using these concerns as a pretext for consolidation after a massive rally, rather than reacting purely to fundamentals.
Let me know what you think of these CAPEX investments in the comments
AI: a promising bet with clear monetization paths
AI appears to be an extremely promising technology, with far more tangible potential than past trends like the Metaverse for instance, which failed to deliver meaningful results quickly. The likelihood of AI generating no significant returns is low, given its rapid adoption across industries.
For companies like Alphabet, these massive CAPEX investments are not just a bet on AI, they also signal a strategic effort to diversify revenue streams beyond Google Search. This reduces dependency on a single business line and strengthens long-term financial stability.
These investments reflect a strong belief in AI’s transformative power, with applications spanning industries such as business operations, consumer products, healthcare, and automotive technology. By investing heavily now, these tech giants are positioning themselves as future market leaders, unlocking new revenue streams, innovative product offerings, and dominance in AI-driven sectors.
AI is not just about creating new businesses, it also enhances existing services with improved monetization potential.
Google is improving search algorithms and ad targeting
Meta is refining personalized advertising
Amazon AWS & Microsoft Azure are optimizing cloud services for AI workloads
Microsoft (Copilot) & Google (Gemini) are advancing AI-driven assistants
While concerns over profitability and ROI are valid, the potential for value creation is evident. Unlike the Metaverse, AI already has clear and scalable monetization paths, making it a much more compelling long-term investment.
Who will benefit from these investments?
These massive CAPEX investments are poised to benefit a wide range of companies across multiple industries.
Here are a few examples.
Semiconductors, chip manufacturers and semiconductor software. Potential winners: NVidia, AMD, Broadcom, Taiwan Semiconductor, ASML, Cadence, Synopsys
Data center, networking and infrastructure. Potential winners: Vertiv, Schneider Electric, Arista Networks
Energy and utilities. Potential winners: Vistra, GE Vernova
Cloud and AI software providers. Potential winners: Snowflake, Palantir, Datadog
Here are a few deep dives for some of these companies
The main risks
To be prepared for any scenario, it’s important to keep in mind some potential risks and their implications:
Over-investment cycle. There is a risk that companies may be overbuilding capacity, leading to excess infrastructure. If this happens, investment might slow significantly. Suppliers directly involved in data center construction, such as NVIDIA, could be the most impacted by this slowdown
Disappointing results. If returns on investment (ROI) fall short, two key effects could follow:
First, there could be a sharp decline in investment, triggering the slowdown we just discussed
Second, the return on invested capital (ROIC) for major tech companies could dramatically drop, which could lower their valuations
Increased competition. Rising competition in the AI and cloud space could drive a price drop, which would directly impact profitability. As a result, margin compression is likely, and these companies could see their valuations decline accordingly.
Energy supply bottleneck. The rapid expansion of data centers could run into an energy supply constraint. If energy becomes a bottleneck, investment will likely slow down, and companies may shift focus to securing reliable and sustainable energy sources. In this scenario, suppliers involved in data centers (like NVIDIA or Schneider Electric) could suffer the most
Understanding these risks allows for better preparation and helps anticipate potential consequences in case things don’t unfold as expected.
Conclusion
In conclusion, the recent surge in CAPEX by the world's leading tech companies is a clear reflection of their strategic focus on AI and cloud infrastructure. While the market is currently focused on concerns surrounding these massive investments, the underlying belief in AI's transformative potential is undeniable. These companies are positioning themselves for future leadership in AI-driven sectors, diversifying their revenue streams, and enhancing existing services to create more value.
Despite the potential for over-investment, disappointing returns, and rising competition, AI presents a unique opportunity for substantial long-term gains, with clear monetization paths that distinguish it from previous technological trends like the Metaverse or the dot-com bubble.
However, it is crucial to remain aware of the risks as these could affect both the pace and profitability of these investments. With this in mind, it is important to stay informed and adaptable to navigate both the opportunities and challenges ahead in the AI industry.
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