UNSUSTAINABLE
But it’s still not fully obvious to me why the broader stock market should cheer these developments.
The bullish take is that Micron’s soaring earnings show that Big Tech’s hyperscalers such as Microsoft, Alphabet’s Google and Amazon are still spending wildly. These giant companies must think that, even at these sky-high prices for components, their data centre investments will earn a decent return.
However, the more extravagant their outlay, the harder that aim becomes (with the caveat that they’re also getting more computing power for their buck, which can be used for cloud services as well as AI). The hyperscalers’ capex bills are projected to exceed a mighty US$1 trillion next year, with some analysts estimating that memory could account for more than a third of that.
This mammoth spending is already crimping Big Tech’s cash flows. But unlike at a consumer-electronics company such as Apple, chip costs don’t yet impact the hyperscalers’ profits by as much. That’s because data centre investments are capitalised on their balance sheets and gradually depreciated over subsequent years, rather than being immediately expensed, as happens at a smartphone or PC manufacturer.
The same memory price shock can “look like strategic capex for one buyer and immediate gross-margin pressure for another”, Morgan Stanley analysts note. So the hyperscalers’ earnings still look comparatively decent, even though they’re storing up some serious future depreciation costs.
Capex booms in technology are “tremendously accretive to earnings”, renowned short seller Jim Chanos told Bloomberg Money recently, as the same dollar spent in a capex boom “is recognised as profits by one entity and deferred by the people spending the dollar”.