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Hypertension for the Hyperscalers!
Join our email list to be the first to see these videos every week: https://mailchi.mp/traderoutescapital/giuox24tmg
YouTube channel - https://www.youtube.com/@bensmarketchat
This week we talk about the steady state of the US economy with small business optimism on the rise, inflation under control and unemployment continuing to hover around full employment levels. Even the UK’s inflation rate is at bay allowing for further falls in the base rate through the spring. So why are stock markets getting so nervous?
Is AI going to destroy the software Industry? Its certainly what the IGV (US Software ETF) would suggest. We don’t believe this will happen and we’ll discuss why.
Are the Hyperscalers ‘doom spending’? Again, investors appear to think so. There’s an underlying tone of sell first & ask questions later syndrome affecting markets. Amazon stock has fallen more than 20% this year alone on its capex plans. We have seen this cycle before when Amazon built AWS in the late 2000’s and again spent heavily on logistics through the COVID period. What happened was that its Free Cash Flow (FCF) virtually disappeared for a couple of years during the spend but then more than doubled from previous highs in the ensuing 2-3 years. This has resulted in a Return On Invested Capital (ROIC) of 12%+ on average throughout the last 20 years. Amazon is doing the same again with AI data centre buildout. FCF is falling into negative numbers this year and next as capex exceeds FCF but, according to consensus estimates at least, climbs above $100bn per year from 2029 onward.
Does it make sense that the hyperscalers in the form of Amazon, Alphabet and Microsoft should spend so much on capex for virtually no return? It would if these businesses were in what’s known in classical economics as ‘perfect competition’ where no company has any advantage or edge on its competitor and must compete on price to grow. These hyperscalers are an effective 3-party Oligopoly. Price will not be the competitive issue here. On the contrary, the AI compute capacity required will be paid for by the user base. There won’t be an alternative source of access. The buildout is partly competitive positioning but mostly for profit. This is a sensible use of capital with way better long-term returns than any mutual fund can generate. As before, traders are taking the short-term view and exiting. This may be another moment in history, when being a contrarian may pay off over a slightly longer time horizon.
Always do your own research or seek the advice of your professional financial advisor.
You can find us on LinkedIn and YouTube, Money Matters, Ben Hakham CEO at Traderoutes Capital.
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By BenJoin our email list to be the first to see these videos every week: https://mailchi.mp/traderoutescapital/giuox24tmg
YouTube channel - https://www.youtube.com/@bensmarketchat
This week we talk about the steady state of the US economy with small business optimism on the rise, inflation under control and unemployment continuing to hover around full employment levels. Even the UK’s inflation rate is at bay allowing for further falls in the base rate through the spring. So why are stock markets getting so nervous?
Is AI going to destroy the software Industry? Its certainly what the IGV (US Software ETF) would suggest. We don’t believe this will happen and we’ll discuss why.
Are the Hyperscalers ‘doom spending’? Again, investors appear to think so. There’s an underlying tone of sell first & ask questions later syndrome affecting markets. Amazon stock has fallen more than 20% this year alone on its capex plans. We have seen this cycle before when Amazon built AWS in the late 2000’s and again spent heavily on logistics through the COVID period. What happened was that its Free Cash Flow (FCF) virtually disappeared for a couple of years during the spend but then more than doubled from previous highs in the ensuing 2-3 years. This has resulted in a Return On Invested Capital (ROIC) of 12%+ on average throughout the last 20 years. Amazon is doing the same again with AI data centre buildout. FCF is falling into negative numbers this year and next as capex exceeds FCF but, according to consensus estimates at least, climbs above $100bn per year from 2029 onward.
Does it make sense that the hyperscalers in the form of Amazon, Alphabet and Microsoft should spend so much on capex for virtually no return? It would if these businesses were in what’s known in classical economics as ‘perfect competition’ where no company has any advantage or edge on its competitor and must compete on price to grow. These hyperscalers are an effective 3-party Oligopoly. Price will not be the competitive issue here. On the contrary, the AI compute capacity required will be paid for by the user base. There won’t be an alternative source of access. The buildout is partly competitive positioning but mostly for profit. This is a sensible use of capital with way better long-term returns than any mutual fund can generate. As before, traders are taking the short-term view and exiting. This may be another moment in history, when being a contrarian may pay off over a slightly longer time horizon.
Always do your own research or seek the advice of your professional financial advisor.
You can find us on LinkedIn and YouTube, Money Matters, Ben Hakham CEO at Traderoutes Capital.