Big Tech capex is a leading indicator for AI semiconductor companies and has been a secular tailwind for our holdings, such as Nvidia and AMD. The combined capex of Big Tech companies has increased from $41.4 billion in 2017 to $150.6 billion in 2022, growing at a CAGR of 29.5%. In the recent earnings calls, management teams from big tech companies are indicating they will continue to invest in AI.

On a side note, increased capex related to AI does not mean AI stocks will move in a linear fashion, rather we track data like this to help us determine what to buy during selloffs, and at the bottom of selloffs.

Semiconductor Market Update

According to the Semiconductor Industry Association (SIA), global semiconductor sales were up 1.9% MoM and down (-4.5%) YoY in September to $44.9 billion. Q3 global semiconductor sales were up 6.3% QoQ and down (-4.5%) YoY to $134.7 billion.

John Neuffer, SIA President and CEO said, “Global semiconductor sales increased on a month-to-month basis for the seventh consecutive time in September, reinforcing the positive momentum the chip market has experienced during the middle part of this year,”increased on a month-to-month basis for the seventh consecutive time in September, reinforcing the positive momentum the chip market has experienced during the middle part of this year,” he further said, “The long-term outlook for semiconductor demand remains strong, with chips enabling countless products the world depends on and giving rise to new, transformative technologies of the future.”

Meanwhile, South Korean exports rose in October as semiconductor exports reported the smallest drop since August 2022 of (-3.1%) YoY in October. Chip sales helped the rise in the country’s exports for the first time in about a year.

Management Commentary on Big Tech Capex 

Meta

Meta spent $32.04 billion in capex in 2022, up 66.5% YoY. 2023 has been a ‘Year of Efficiency’ and reducing capex was a priority for the company. Reduced spending in 2023 was possible due to cost savings, particularly in non-AI servers and the capex shift to 2024.

Susan Li, CFO of Meta, said in the recent earnings call. “Capital expenditures were below the prior year levels primarily due to lower server and data center construction spend as we prepared to shift to our new data center design, as well as payment timing.”to lower server and data center construction spend as we prepared to shift to our new data center design, as well as payment timing.”

The management during Q3 results lowered the upper range of the 2023 capex. It is expected to be $27 billion to $29 billion from the earlier reduced estimate of $27 billion to $30 billion, representing a YoY decline of (12.6%) at the mid-point. However, they expect higher capex for next year in the range of $30 billion to $35 billion, representing a YoY growth of 16.1% at the mid-point. The CFO said in the earnings call, “With growth driven by investments in servers, including both non-AI and AI hardware, and in data centers as we ramp up construction on sites with the new data center architecture we announced late last year.”With growth driven by investments in servers, including both non-AI and AI hardware, and in data centers as we ramp up construction on sites with the new data center architecture we announced late last year.”

Microsoft

Microsoft spent $28.40 billion in capex in 2022, up 3.3% YoY. YTD September 2023, the company has already spent $29.7 billion and therefore will see a significant jump in capex for the year 2023, helped by investments in cloud and AI.

Amy Hood, CFO of Microsoft, said in the recent earnings call. “Capital expenditures, including finance leases were $11.2 billion to support cloud demand, including investments to scale our AI infrastructure. Cash paid for PP&E was $9.9 billion.” including investments to scale our AI infrastructure. Cash paid for PP&E was $9.9 billion.” She further added, “We expect capital expenditures to increase sequentially on a dollar basis, driven by investments in our cloud and AI infrastructure. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.”driven by investments in our cloud and AI infrastructure. As a reminder, there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.”

Nvidia had announced last year that they have a multi-year collaboration with Microsoft to build a giant AI supercomputer using thousands of Nvidia GPUs, Nvidia Quantum-2 InfiniBand, and full stack of Nvidia AI software to cater to the growing demand for AI.

Alphabet

The company spent $31.49 billion in capex in 2022, up 27.8% YoY. In the recent quarter, the company’s capex grew by 10.7% YoY to $8.06 billion. YTD September 2023, the capex was $21.3 billion down (-11.1%) YoY. However, the company will see an increase in Q4 and continue to grow in 2024.

Ruth Porat, CFO of Alphabet, said in the recent earnings call. “Finally, our reported CapEx in Q3 was $8 billion, driven overwhelmingly by investment in our technical infrastructure with the largest component for servers, followed by data centers, reflecting a meaningful increase in our investments in AI compute.reflecting a meaningful increase in our investments in AI compute.

The growth in reported cash CapEx in Q3 is somewhat muted due to the timing of supplier payments, which can cause variability from quarter-to-quarter. We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.” We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024.”

She further clarified to an analyst that “2024 aggregate CapEx will be above the full year 2023.” “2024 aggregate CapEx will be above the full year 2023.”

The main takeaway is that the investment in technical infrastructure is growing and will continue to grow in 2024. There is an increasing shift in investment in technical infrastructure (i.e., AI and cloud) compared to other capex like office facilities, which is of prime importance for our portfolio. Ruth had clarified the change in shift in the Q4 2022 earnings call, “We're increasing our investments in technical infrastructure. And that's not just for AI. That's to support investments across Alphabet, in particular in Cloud as well. And at the same time, we're meaningfully decreasing our CapEx for office facilities.”we're meaningfully decreasing our CapEx for office facilities.”

Amazon

The company spent $58.62 billion in capex in 2022, down (-2%) YoY. The key takeaway is the company’s technological infrastructure spend is increasing. To understand the breakup of Amazon’s capex, we looked at some of the other previous earnings calls and understand technology infrastructure spend to be over 50% of the total capex. Brian Olsavsky, CFO of the company said in the Q2 2022 earnings call, “In 2021, we incurred approximately $60 billion in capital investments. , “In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores, “In 2021, we incurred approximately $60 billion in capital investments. About 40% of that is comprised of technology infrastructure, primarily supporting AWS as well as our worldwide stores business. Another 30% of the $60 billion was fulfillment capacity and a little less than 25% was for transportation, remaining 5% was comprised of things like corporate space and physical stores.” He further said, “We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”“We expect infrastructure to represent a bit more than half of our total capital investments in 2022.”

The guidance for 2023 capex is $50 billion, down (14.7%) YoY. However, technology infrastructure continues to grow. Brian said in the recent earnings call. “Now, let's turn to our capital investments. We define our capital investments as a combination of CapEx plus equipment finance leases. These investments were $50 billion for the trailing 12-month period ended September 30, down from $60 billion in the comparable prior year period. For the full year 2023, we expect capital investments to be approximately $50 billion compared to $59 billion in 2022. We expect fulfillment and transportation CapEx to be down year-over-year, partially offset by increased infrastructure CapEx to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.”We expect fulfillment and transportation CapEx to be down year-over-year, partially offset by increased infrastructure CapEx to support growth of our AWS business, including additional investments related to generative AI and large language model efforts.”

We will be listening closely for 2024 capex discussions next quarter.

Conclusion 

We continue to monitor Big Tech capex commentary and are encouraged by Meta’s recent guide for FY2024. Meta is the only company that has provided this level of visibility. In addition to a potential increase in capex from Big Tech, we are hearing across the board that a higher allocation of capex is going toward AI infrastructure.

With that said, it’s normal for cloud IaaS to go through periods of optimization. Given Meta’s guide, we are hopeful a period of optimization will not happen in 2024. Meanwhile, we will continue to closely monitor Big Tech capex comments closely as an important proxy for AI accelerators.  

Royston Roche, Equity Analyst at the I/O Fund, contributed to this analysis.

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