In the past, we have written about the importance of Big Tech’s capex programs and its impact on demand for semiconductors. Particularly in 2021 and 2022, where there was a significant increase in data center and cloud computing related capex. It has been our position that Big Tech capex – which includes Google, Meta, Amazon and Microsoft – is a leading indicator for AI semiconductor companies and has been a secular tailwind for our holdings such as Nvidia and AMD. Now that Big Tech have reported their fiscal 2022 earnings, we thought it’d be a good time to review the 2023 capital expenditure outlook for the IT market and Big Tech.
2023 IT Market Spending Forecasts
In January 2023, Gartner released their 2023 forecasts for overall IT spending. Gartner forecasts growth of $4.5 trillion, an increase of 2.2% from 2022. Looking at the breakdown, Software and IT services continue to see meaningful y/y growth. Meanwhile, after exhibiting healthy 12% growth in 2022, Data Centers is forecasted to be almost flat at 0.7% in 2023. Devices continues to be negatively impacted by inflationary pressures impacting consumer demand.
In contrast to Gartner’s 2023 forecast of flat growth in overall Data Center spending. The growth in Hyperscale Data Centers is forecasted to grow at levels that vastly outpaces Data Centers. Hyperscale Data Centers are large data centers operated by Amazon, Microsoft and Google.
According to Precedence Research, The global hyperscale data center market size was estimated at USD 62 billion in 2021 and is expected to hit around USD 593 billion by 2030, a forecasted growth rate (CAGR) of 28.52% during the forecast period 2022 to 2030.
This growth is also reflected in forecasts for the Artificial Intelligence Chip market. In December 2022, Allied Market Research forecasts that the global artificial intelligence chip market will grow from $11.2 billion in 2021 to reach $263.6 billion by 2031, growing at a CAGR of 37.1% from 2022 to 2031. AI chips – supplied by Nvidia and AMD – will provide the computing power necessary to drive these hyperscale data centers.
Big Tech FY2023 Earnings Commentary
How did the recent Big Tech commentary on 2023 capex align with these market forecasts? Overall, Big Tech has forecasted capex to be flat to slightly down y/y. However, an important theme was a shift toward higher ROI capex such as technical infrastructure and reduction in lower ROI capex, such as office facilities. After embarking on an aggressive capex program in 2021 and 2022, Big Tech has taken a pause to reassess their cost base and to reprioritize capex in light of the current macro environment.
Put another way, the size of the capex pie isn’t expected to grow in 2023 compared to 2022, but the slice spent on technical infrastructure (i.e. Cloud and AI), will grow at the expense of labor, office facilities etc. A change in capex mix that we believe is supportive in the medium-term of NVDA and AMD.
In 2016, Big Tech in total spent $30b in capex, in 2022 they spent $150b, a five-fold increase. Big Tech commentary indicates 2023 capex will be flat to slightly lower than 2022.
What did FAAMG say about 2023?
Alphabet:
Google spent $31.5b on capex in 2022 compared to $24.6b in 2021 and forecasted 2023 to be at a similar level to 2022. Although the forecasted growth rate in capex is lower than historical levels. Management commentary around capex was very telling on where the priorities lay. On the Q422 call, management referenced AI a total of 56 times in relation to its importance to the future growth of the company. Here are a few snippets that stood out with an emphasis on AI being Google’s #1 priority.
Sundar Pichai, CEO
- I'll focus on two major things today in a bit more detail, and then I'll give a shorter-than-usual quarterly snapshot from across our business. First, how we unlock the incredible opportunities AI enables for consumers, our partners and for our business; and second, how we focus our investments and make necessary decisions as a company to get there … the AI opportunity ahead. AI is the most profound technology we are working on today. Our talented researchers, infrastructure and technology make us extremely well positioned, as AI reaches an inflection point.
- Our AI is a powerful enabler for businesses and organizations of all sizes and we have much more to come here. There's a few flavors of this. Google Cloud is making our technological leadership in AI available to customers via our Cloud AI platform, including infrastructure and tools for developers and data scientists like Vertex AI.
- AI also continues to improve Google's other products dramatically
- On the AI side, it is a really exciting time. I think we've been investing for a while, and it's clear that the market is ready. Consumers are interested in trying out new experiences. I think I feel comfortable with all the investments we have made in making sure we can develop AI responsibly.
Philip Schindler, CMO
- Going forward, we are focused on growing revenues on top of this higher base through AI-driven innovation. Sundar highlighted the incredible opportunities underway with AI and the transformative impact it will have on businesses. Already, breakthroughs in everything from natural language understanding to generative AI are fueling our ability to deliver results that drive meaningful performance for advertisers and are useful to users.
Ruth Porat, CFO
- And as I indicated in opening comments, when we look at capex for 2023, we do expect it's going to be generally in line with 2022 with an important mix shift. 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.
- With AI, this is obviously an Alphabet strategic priority, and we see huge opportunity ahead
Meta:
For Meta, capital expenditures, including principal payments on finance leases, was $32b billion for 2022 compared to $19.3b in 2021. 2022 capex was driven by investments in servers, data centers and network infrastructure. Meta forecasted 2023 capex to be between $30-33b down from their prior guidance of $34-37b. Similar to Google, management commentary around AI and capex was very telling on where the priorities lay.
Mark Zuckerberg, CEO
- Now before getting into our product priorities, I want to discuss my management theme for 2023, which is the Year of Efficiency. We closed last year with some difficult layoffs and restructuring some teams. And when we did this, I said clearly that this was the beginning of our focus on efficiency and not the end. And since then, we have taken some additional steps, like working with our infrastructure team on how to deliver our roadmap while spending less on capex
- And next, I want to give some updates on our priority areas. Our priorities haven’t changed since last year. The two major technological waves driving our roadmap are AI today and over the longer term, the metaverse.
- AI, it’s the foundation of our discovery engine and our ads business. And we also think that it’s going to enable many new products and additional transformations in our apps. Generative AI is an extremely exciting new area with so many different applications. And one of my goals for Meta is to build on our research to become a leader in generative AI in addition to our leading work in recommendation AI.
- Yes, I can start with generative AI. Yes, I think this is a really exciting area. And I mean, I’d say the two biggest themes that focused on for this year and one is efficiency and then the kind of the new product area is going to be the generative AI work.
- A lot of the trends that we are seeing here is, we are using larger models, which require more computation. We have shifted the models from being more CPU-based to being GPU-based
There is a positive readthrough on Zuckerberg’s comment on the shift from CPU to GPU models. This could potentially benefit Nvidia and their H100 GPU.
Susan Li, CFO
- Turning now to the capex outlook for 2023, we expect capital expenditures to be in the range of $30 billion to $33 billion, lowered from our prior estimate of $34 billion to $37 billion. The reduced outlook reflects our updated plans for lower data center construction spend in 2023 as we shift to a new data center architecture that is more cost efficient and can support both AI and non-AI workloads
- So we’re shifting our data centers to a new architecture that can more efficiently support both AI and non-AI workloads. And that’s going to give us more optionality as we better understand our demand for AI over time. Additionally, we’re expecting that the new design will be cheaper and faster to build than previous data center architecture. Along with the new data center architecture, we’re going to optimize our approach to building data centers. So we have a new phased approach that allows us to build base plans with less initial capacity and less initial capital outlay, but then flex up future capacity quickly if needed. We’re still planning to grow AI capacity significantly, and that connects
- The current surge in capex is really due to the building out of AI infrastructure, which we really began last year and are continuing into this year. We will be measuring the ROI of these AI investments, and their returns will continue to inform our future spend. Our intention is still to bring capex as a percent of revenue down, but capital intensity in the nearest term is really going to depend, in part, on the revenue outlook and our needs to further build AI capacity for future demand
Javier Olivan, COO
- I think if you look at the strategy on ads, we really have two parts, which is continue investing in AI and that’s where we are seeing a lot of the improvement in ads relevance.
Microsoft:
For Microsoft FY 2022 capex, including assets acquired under financial leases, was $29.2 and compared $24.2 to FY 2021. For FY 2023, Microsoft has stated “… we expect a sequential decrease on a dollar basis with normal quarterly spend variability in the timing of our cloud infrastructure buildout.”
Satya Nadella – Chairman and Chief Executive Officer
The age of AI is upon us and Microsoft is powering it. We are witnessing non-linear improvements in capability of foundation models, which we are making available as platforms. And as customers select their cloud providers and invest in new workloads, we are well positioned to capture that opportunity as a leader in AI. We have the most powerful AI supercomputing infrastructure in the cloud. It’s being used by customers and partners like OpenAI to train state-of-the-art models and services, including ChatGPT.
Amazon:
For Amazon, capex including equipment financial leases, was $58.3b in 2022 compared to $55b in 2021. These expenditures primarily reflect investments in technology infrastructure. In the past, management has indicated that about 50% of total capex has gone toward infrastructure. Management gave no guidance for 2023 other that these investments will continue.
Conclusions
Big Tech is not immune to the weaker macroeconomy nor consumer. This has been evident in their earnings releases. For Big Tech’s next capex act, their commentary focused on shifting capex to higher ROI investments with a focus on cost efficiency. These comments have increased our conviction that investments in AI are a key strategic priority and will continue.
From an investing perspective, it supports our investment thesis in Nvidia and AMD. Nvidia’s new H100 GPU chip has positioned it to benefit from the buildout in AI related and hyperscale data center infrastructure. Critically, given their dominant market position in AI chips, this will enable Nvidia to then monetize and gain a greater share in the software stack. In addition, AMD plans to commercially release its MI300 GPU this year.
Per the most recent AMD earnings call:
“MI300 will be the industry's first data center chip that combines a CPU, GPU and memory into a single integrated design, delivering 8x more performance and 5x better efficiency for HPC and AI workloads, compared to our MI250 accelerator currently powering the world's fastest supercomputer. MI300 is on track to begin sampling to lead customers later this quarter and launch in the second half of 2023.”
In the most recent earnings report, Nvidia management commented that the H100 adoption rate and software monetization at the enterprise level is happening faster than expected. We will further outline how Nvidia is well positioned to benefit from this spending in AI and what to look for in Nvidia’s upcoming earnings report. We’ve recently covered AMD here.
Keep a look out for future posts.