As the return on investment for artificial intelligence (AI) investments by major tech companies reaches historic lows, market anxiety is rising ahead of the second-quarter earnings reports from Microsoft (MS) and Meta. Following Alphabet's earlier results, which indicated an expected increase in capital expenditures (CAPEX), attention is focused on potential adjustments in corporate valuations.
According to the IT industry on July 29, Microsoft and Meta are set to release their second-quarter (April to June) earnings after the market closes today, Eastern Time. In Korea, the results will be available early on July 30.
On July 22, Alphabet reported an 82% surge in cloud revenue but raised its annual CAPEX forecast to as high as $205 billion, causing its stock to fluctuate. The scale of capital investment in Microsoft and Meta's earnings reports is expected to be a key variable influencing market reactions.
The market consensus has already reached elevated expectations. Microsoft has provided a revenue guidance of $86.7 billion to $87.8 billion for the quarter, while the market consensus stands higher at around $89.4 billion. The growth rate of Azure (39-40% guidance) is also a focal point for investors.
Meta's revenue consensus is between $60.1 billion and $60.2 billion, with earnings per share (EPS) expected to be between $7.13 and $7.23. Given that the first quarter saw a 33% revenue growth, a slowdown is anticipated for this quarter.
The market's sensitivity stems from a historic low in return on invested capital (ROIC). ROIC measures how much profit a company generates relative to its invested capital and is a critical metric for assessing the performance of big tech's AI investments.
The ratio of capital expenditures to revenue for five major hyperscalers—Amazon, Microsoft, Alphabet, Meta, and Oracle—soared to 24.7% last year. KB Securities predicts that this group's combined ROIC will hit a low of 17.6% in 2027 before rebounding to 20.8% in 2028, indicating that the burden of capital investment has yet to be fully reflected in profitability metrics.
However, concerns are growing that the rapid increase in CAPEX may be causing free cash flow (FCF) to deteriorate first.
Amazon's FCF over the past 12 months plummeted 95% from $25.9 billion to $1.2 billion. Microsoft also saw its FCF drop 22% from $20.3 billion in the previous fiscal quarter (January to March) to $15.8 billion, influenced by a nearly doubling of capital expenditures from $16.7 billion to $30.9 billion during the same period. Microsoft has indicated that its capital expenditures for this quarter will exceed $40 billion, suggesting a further decline in FCF for the second quarter.
Alphabet went a step further, reporting negative FCF. The company's operating cash flow for the second quarter was $39.069 billion, but capital expenditures reached $44.924 billion, resulting in a negative FCF of $5.855 billion. This marks a rare instance of Alphabet posting negative FCF on a quarterly basis.
To address this, Alphabet initiated a $49.6 billion capital increase and issued $20.3 billion in unsecured bonds during the second quarter. Despite a 'defensive logic' stating that its cloud backlog increased by over $50 billion to $514 billion compared to the previous quarter, the market reacted more sensitively to the news of increased CAPEX.
There is a noticeable divergence in how companies are perceived. Investment banks are highlighting that the connection between CAPEX and revenue is becoming a major topic for stock price decoupling in the second half of the year.
In the first quarter, Alphabet's stock rose based on a 63% growth in cloud revenue and a backlog of $460 billion, while Meta's stock dropped over 6% immediately after announcing an increase in its upper CAPEX limit to $145 billion, despite reporting a 33% revenue growth and a 41% operating margin.
Meta's structure, which does not sell cloud computing resources externally, is perceived by the market as having relatively low visibility for converting infrastructure investments into revenue. How well Meta addresses these concerns in its second-quarter results will be crucial.
Warnings regarding the financial health of big tech companies have also emerged. Moody's, in a report released this month, analyzed six companies, including Microsoft, Amazon, Alphabet, Meta, Oracle, and CoreWeave, indicating that the expansion of AI infrastructure investments is worsening free cash flow and threatening credit ratings.
However, while large tech firms with strong cash generation capabilities are unlikely to see their investment grades shaken in the short term, Oracle and CoreWeave are expected to face relatively greater burdens. Oracle maintains an investment-grade rating of 'Baa2' but has a 'negative' outlook, while CoreWeave is already classified as high-yield with a 'Ba3' rating.
Following the report, concerns about the burden of AI investments have led to a sharp decline in semiconductor stocks, contributing to downward pressure on the domestic KOSPI market in conjunction with adjustments in the Philadelphia Semiconductor Index. In the domestic market, stocks linked to the AI semiconductor supply chain, such as Samsung Electronics and SK Hynix, are clearly moving in tandem with big tech CAPEX indicators.
The overall earnings season for big tech, which includes Microsoft and Meta, and the upcoming earnings report from Amazon next week, is expected to influence volatility in the domestic stock market.
* This article has been translated by AI.
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