After read Peter, I have more questions, because the hyperscalers didn’t change their CAPEX investments, and why Meta is a winner and Alphabet no, if they can use AI in a similar way, and happen the same between Msft and Salesfroce?
That is a really good question. For now hyperscalers have not changed their CapEx plans for 2025 which is a bit odd because there are other signs indicating that end-user demand is slowing a bit here and there are significant bottlenecks around the grid to add data centers. I think these management teams are potentially making a huge financial mistake, but as write in the post, note how US technology firms are laying off people. The higher CapEx will put pressure on EBITA margins going forward through depreciations and the higher invested capital will lead to lower ROIC in the future which I wrote about in the beginning of the year. To take some of that pressure off CFOs are laying off people to lower other operating expenses.
On Meta vs Google, the market may be thinking, and I'm speculating here, that Meta is doing an "Android" on the AI industry. They ensure that there open source offering becomes market leader and with custom-made chips the open source model is not only cheaper on software but also on hardware. Over time Meta can leverage that into profits somehow - that is likely the market's thinking. Alphabet was just part of the hyperscaler cluster where the market thought that capital and size would alone drive an economic moat through better foundational models. But that narrative has changed and thus forward-looking EBITA margins and FCF are negatively impacted leading to re-valuation.
There is still dust in the air, so the conclusions and narrative will continue to evolve in the months to come ;-)
After read Peter, I have more questions, because the hyperscalers didn’t change their CAPEX investments, and why Meta is a winner and Alphabet no, if they can use AI in a similar way, and happen the same between Msft and Salesfroce?
That is a really good question. For now hyperscalers have not changed their CapEx plans for 2025 which is a bit odd because there are other signs indicating that end-user demand is slowing a bit here and there are significant bottlenecks around the grid to add data centers. I think these management teams are potentially making a huge financial mistake, but as write in the post, note how US technology firms are laying off people. The higher CapEx will put pressure on EBITA margins going forward through depreciations and the higher invested capital will lead to lower ROIC in the future which I wrote about in the beginning of the year. To take some of that pressure off CFOs are laying off people to lower other operating expenses.
On Meta vs Google, the market may be thinking, and I'm speculating here, that Meta is doing an "Android" on the AI industry. They ensure that there open source offering becomes market leader and with custom-made chips the open source model is not only cheaper on software but also on hardware. Over time Meta can leverage that into profits somehow - that is likely the market's thinking. Alphabet was just part of the hyperscaler cluster where the market thought that capital and size would alone drive an economic moat through better foundational models. But that narrative has changed and thus forward-looking EBITA margins and FCF are negatively impacted leading to re-valuation.
There is still dust in the air, so the conclusions and narrative will continue to evolve in the months to come ;-)
Very insightful! Good luck with everything Peter!
Thanks Marius!