Tech earnings preview: Investors want to see returns on AI spending boom

AI Capex & Cloud Earnings Preview: Tech Giants Report

Key Concepts:

• AI Capex: Capital expenditure related to Artificial Intelligence infrastructure (data centers, GPUs, etc.).
• Azure: Microsoft’s cloud computing platform.
• TPUs: Tensor Processing Units – Google’s custom-designed AI accelerator chips.
• ASICs: Application-Specific Integrated Circuits – chips designed for a specific purpose, like AI processing.
• Gemini: Google’s latest large language model.
• Co-pilot/Agentic Co-pilot: Microsoft’s AI assistant integrated into its products.
• ROIs: Return on Investment – a measure of profitability.
• MAG Five: Meta, Apple, Google (Alphabet), Microsoft, and Amazon.

I. The AI Capex Boom & Investment Demands

The upcoming quarterly earnings reports from major tech companies (Meta, Microsoft, Amazon, Alphabet) are heavily focused on their investments in Artificial Intelligence (AI). These four companies are collectively projected to spend over $400 billion in capital expenditures (capex) this year, according to Faxet estimates. Analyst Doug Clinton estimates the “MAG Five” (excluding Tesla and Nvidia) will see a 34% year-over-year increase in capex by 2026, but believes the actual increase could be closer to 50%. He states he’s “never seen anything like it in his career.”

Ali Mogarabi of West End Capital Management agrees the AI capex boom will likely continue, potentially exceeding consensus forecasts. However, he emphasizes that increased spending will bring increased scrutiny from the investment community, demanding quicker returns on investment (ROIs). The focus will be on translating AI investments into revenue and profits, both in AI-specific offerings and overall cloud services.

II. Chip Plays: Beyond Nvidia

Discussion centered on whether to continue investing in chip manufacturers benefiting from the AI boom. While acknowledging continued demand for GPUs (and therefore potentially memory chips like Micron’s MU), Mogarabi indicated his firm has exited positions in Nvidia, Micron, and Broadcom.

He favors ASML (ASML), positioning it as the “picks and shovels” of the chip space, holding a “monopoly” in the industry. Nvidia faces increasing competition from Google’s TPUs and other ASICs, with Broadcom being a key partner in manufacturing ASICs, particularly for Google’s TPUs.

III. Cloud Growth Expectations & Company-Specific Outlooks

The conversation then shifted to cloud growth expectations for Amazon (AWS), Microsoft (Azure), and Google Cloud. Mogarabi anticipates acceleration in cloud revenue across all three, with Amazon potentially leading the growth due to increased capacity and the ongoing cloud transition.

• Amazon (AWS): Previous limitations were due to capacity constraints, which are being addressed through increased investment.
• Google Cloud: The recent release of Gemini, Google’s latest large language model, is expected to drive cloud revenue growth, supported by positive download statistics.
• Microsoft Azure: While still the number two player, Azure is leveraging Copilot/Agentic Copilot and partnering with Anthropic alongside OpenAI to enhance its offerings and combat competition.

IV. Oracle’s Position & Financial Considerations

Oracle’s entry into the cloud market was also discussed. Mogarabi expressed caution, noting Oracle is “burning cash” and increasing debt to fund data center construction (estimated at around $300 billion). He also highlighted uncertainty surrounding access to capital for OpenAI, a key client for Oracle.

V. Meta’s Potential & Ad Revenue Trends

Regarding Meta (Facebook), Mogarabi acknowledged a positive technical chart outlook. He reported that ad prices in Q4 2023 increased by approximately 8.8-9%, aligning with consensus estimates.

He anticipates potentially positive revenue guidance from Meta, driven by:

• Increased Ad Prices: Current data indicates strong ad pricing.
• Political Advertising: The upcoming midterm elections are expected to boost ad revenue, with Meta planning to allow political ads (with limitations in the week before the election).
• Ad Inventory: Overall ad inventory is also contributing to positive trends.

VI. Notable Quotes

• Doug Clinton (via discussion): “He’s never seen anything like it in his career” – referring to the pace of AI capex acceleration.
• Ali Mogarabi: “ASML…is the true picks and shovels of chips.” – highlighting ASML’s crucial role in chip manufacturing.
• Ali Mogarabi: “The investment community is going to demand, uh, ROIs on that capex, um, you know, earlier or or sooner or more quickly.” – emphasizing the need for demonstrable returns on AI investments.

VII. Technical Terms & Concepts

• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• GPU (Graphics Processing Unit): A specialized electronic circuit designed to rapidly manipulate and display images. Increasingly used for AI workloads.
• ASIC (Application-Specific Integrated Circuit): A microchip designed for a specific application, offering high performance and efficiency for that task.
• Cloud Computing: Delivering computing services—servers, storage, databases, networking, software, analytics, and intelligence—over the Internet (“the cloud”).

VIII. Logical Connections

The discussion flowed logically from the overarching theme of AI capex to specific investment strategies within the chip sector, then to cloud growth prospects, and finally to individual company outlooks (Oracle and Meta). Each section built upon the previous one, exploring the implications of the AI boom across different segments of the tech industry.

IX. Data & Statistics

• $400 Billion: Projected total capex for Meta, Microsoft, Amazon, and Alphabet this year.
• 34%: Estimated year-over-year capex growth for the MAG Five by 2026 (Doug Clinton’s initial estimate).
• 50%: Doug Clinton’s revised estimate for MAG Five capex growth.
• 8.8-9%: Increase in Meta’s ad prices in Q4 2023.
• $300 Billion: Estimated funding needed for Oracle’s data center construction.

X. Synthesis & Conclusion

The upcoming earnings reports will be pivotal in assessing the viability of the massive investments being made in AI. While the AI capex boom is expected to continue, investors will be closely scrutinizing the ability of tech giants to translate these investments into tangible revenue and profits. The discussion highlighted the importance of looking beyond traditional chip plays like Nvidia and considering companies like ASML, which are foundational to the entire AI ecosystem. Cloud growth remains a key driver, with Amazon and Google potentially leading the way, while Oracle faces financial challenges. Meta’s ad revenue trends appear positive, suggesting a potentially strong earnings report. Ultimately, the success of these companies will hinge on their ability to demonstrate a clear return on their AI investments.