Kaushik
Equity Research Writer for Wiseman Capital
Rapid revenue growth makes the capex bear case harder to justify for Microsoft, Alphabet, Meta and Amazon. Their latest cited growth rates are 18%, 23%, 28% and 16% in Q2, respectively; their scale does not seem to be slowing them as expected. x.comÂ
Record-high positioning in hyperscalers and the Magnificent Seven could bring short-term weakness if the market trades against crowded holdings. The medium-term hyperscaler thesis still looks attractive, but the near-term positioning risk tempers it. x.comÂ
Amazon, Alphabet, Meta, Microsoft and Oracle are likely to keep spending their free cash flow rather than deliver it to shareholders, and the market knows it. If investors believed consensus FCF estimates, like those @rbrtrmstrng shared, the megacaps would trade materially higher; instead the market expects them to spend even more on AI, or the next big thing, by 2030. They just raised capex estimates about 30-50% across the board, and either way they'll find something else to spend FCF on. … Show more
A ten-year low in forward P/E makes hyperscaler valuations look more than reasonable. Goldman Sachs' chart tracks Amazon, Alphabet, Meta, Microsoft and Oracle as a basket. x.comÂ
Negative free cash flow at Amazon, Alphabet, Microsoft, Meta and Oracle reflects value-creating investment, not weakness. Hyperscalers' combined return on incremental capital is above 35% against about an 8% cost of capital. Their combined FCF is forecast to fall from $170B in early 2024 to -$265B in 2027, then recover to about $505B by 2030, with returns above the cost of capital throughout. Walmart had negative FCF for 14 years from 1973 yet returned 33% a year. Profit must keep pace. x.comÂ
Microsoft, Amazon, Alphabet and Meta could be the big short if their AI capex is no longer funded from free cash flow but from dilution and bond and note sales. x.comÂ
Hyperscalers' forward P/E has contracted 20% even as estimates ramped, making it rare to see things get much worse. Rising GPU rents and new lows in availability make the AI fears a fade; hyperscalers should lead. The next two weeks will be gut-wrenching amid the OpenAI raise, Anthropic S-1, Fed, midterms and mutual-fund selling into year-end, but that is the time to buy. x.comÂ
Hyperscalers look positioned to capture value from other industries in the agentic era. Amazon, Microsoft, Meta and Alphabet are all well positioned and proactive, with a good chance they all extract value from other markets, so no loser among them is clear yet. Businesses relying on convenience or brand, or charging high fees or interest such as banks and card issuers, must trade margin for volume. Alphabet has the largest agentic distribution, from Search and Android to Gemini. x.comÂ
The Big 5 hyperscalers sit in the middle of a capital cycle that points to understated depreciation and future write-downs. S&P 500 net investment to GDP is about 2.07%, above any prior cycle except the aftermath of the March 2000 Nasdaq peak, and markets have historically peaked mid-cycle as spending kept rising. Microsoft, Amazon, Alphabet, Meta and Oracle carry about $3 trillion of commitments, leases and guarantees as free cash flow turns negative, so 2028-29 write-offs could hit hard. x.comÂ
AI spending ultimately flows back to the hyperscalers, which still look overlooked by retail investors. Alphabet, Meta, Microsoft and Amazon may be near all-time highs now, but they should reach new highs in roughly three years. x.com x.comÂ