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Key points:
Big Tech’s AI CapEx has risen sharply, compressing margins temporarilyMicrosoft reports early cost-saving successes from AI integrationTSMC seen as a more secure AI play compared to NvidiaShifts in technology mean winners and losers can change rapidly
Annabelle Miller from ECP Asset Management highlights a rising trend in AI investments among major technology companies, indicating a notable increase in capital expenditure across the sector. Annabelle points to the swift response triggered by Deep Sea’s emergence from China earlier this year, spurring hyperscalers like Microsoft (NASDAQ: MSFT ), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG), and Meta (NASDAQ: META) into massive AI-related capital outlays. The capital intensity, defined as capital expenditures to sales, for these companies has grown from 11% in 2020 to over 20% in 2024, with a collective investment of over $300 billion expected this year and projections hitting $500 billion by 2030.
Annabelle observes that this surge in spending is leading to short-term compression in operating margins as these investments impact profit and loss statements. Nevertheless, evidence of long-term benefit is already emerging, as Microsoft recently attributed over $500 million in internal cost savings to AI-driven efficiencies. The expectation is for significant margin expansion by 2030 as companies harness further operational benefits from these investments.
Addressing the AI supply chain, Annabelle sites strong momentum in Taiwan Semiconductor Manufacturing Company (TSMC), believing its dominant role provides more certainty than Nvidia (NASDAQ: NVDA), which carries greater technology risk. Recent developments such as Nvidia’s H20 chip reentry into China are noted, yet Annabelle expresses preference for TSMC's resilient market position.
