The AI arms race among tech giants continues to intensify, with free cash flow deteriorating rapidly, while memory chip manufacturers are quietly accumulating cash. Nomura Securities believes the market is fundamentally mispricing the memory sector.
According to reports, third-quarter earnings from the five major technology companies have been released one after another, showing that AI investment intentions have only grown stronger rather than diminished. However, the financial strength of these companies has begun to diverge. Meta's quarterly free cash flow turned negative for the first time since its IPO, recording -$2.1 billion. Alphabet (NASDAQ: GOOGL) posted negative free cash flow for two consecutive quarters, reaching -$9.1 billion. Amazon's trailing twelve-month free cash flow gap widened to -$42.4 billion. Meanwhile, memory chip makers continue to accumulate cash. According to Nomura estimates, the Korean memory duo of Samsung Electronics and SK Hynix are trading at a forward price-to-earnings ratio of only about 2-3x for 2027, representing an 85-90% discount to tech giants.
In a report published on October 30, Nomura pointed out that current market pricing for the memory sector implies an assumption that earnings have peaked, but the firm explicitly disagrees with this judgment. The report argues that memory supply shortages will persist until 2028, long-term supply agreements are increasing, and the large-scale shareholder return cycle for memory manufacturers has only just begun. Against the backdrop of overall pressure on the technology sector, memory is a safe haven worthy of greater attention.
AI investment commitment remains firm, but financial endurance is starting to diverge
Nomura's report shows that enterprise-level AI investment has evolved into a survival necessity, with companies drawing on operating cash flow, debt, and equity financing through multiple channels. In the third quarter, only Microsoft (NASDAQ: MSFT) maintained positive free cash flow, recording +$18.6 billion. Alphabet (NASDAQ: GOOGL) announced $80 billion in equity financing in June this year and suspended buybacks. Meta issued non-voting Class C shares and similarly halted buybacks. Amazon's long-term debt rose to approximately $107.5 billion during the year. The capital market's reaction directly reflected investor preferences — Microsoft, with positive cash flow, saw its stock price essentially flat, while Meta, Alphabet (NASDAQ: GOOGL), and Amazon fell 7%, 10-13%, and 5-7% respectively after their earnings releases.
On the 2027 capital expenditure front, none of the five companies provided specific figures, but all made clear they will continue to increase spending. Nomura cited SK Hynix data stating that global cloud service provider capital expenditure growth could reach 60% in 2027, corresponding to combined spending of approximately $1.2 trillion for the four major hyperscale cloud providers, far exceeding the market consensus estimate of 30-35% growth. Nomura's estimates show that under a 60% growth scenario, the four companies' combined free cash flow would turn negative to -$144 billion in 2027, with the funding gap needing to be filled through debt and equity financing, concentrating capital further among companies with strong financing capabilities.
Cloud business profitability improves, but existing businesses are being eroded by AI
In the third quarter, the three major cloud platforms — Azure, Google Cloud, and AWS — generated combined revenue of $109.9 billion, up 56% year over year, with backlog orders reaching as high as $1.82 trillion. AWS and Google Cloud posted operating margins of 38.7% and 36.2% respectively, with profitability continuing to improve. Nomura estimates that under baseline assumptions of $50 billion per GW of capital expenditure and $19 billion in annual revenue, cloud data center IRR is approximately 6-15%. If calculated at current spot leasing prices of $40 billion per GW per year, IRR could rise to 13-31%.
However, the cannibalization effect of AI on existing businesses has begun to emerge. Google Search revenue growth slowed from 17% in the second quarter to 12% in the third quarter. Query volume growth hit a five-year high, but Google's own AI mode is diluting monetization efficiency per query. Nomura noted that this indicates AI investment is not just a growth tool but also a defensive measure to protect existing businesses — even Google, the heaviest investor, cannot remain unscathed.
Third-quarter capital expenditure missed expectations, reflecting supply bottlenecks rather than retreat in willingness
Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and Meta all reported third-quarter capital expenditure below market expectations. Microsoft's actual spending was $45.2 billion, below its own guidance of over $50 billion, due to delays in third-party data center capacity delivery, with some spending pushed to the first half of 2027. Additionally, Microsoft adjusted the accounting treatment of building useful lives, classifying new leases as operating leases, which reduced reported capital expenditure figures, though actual spending plans remain unchanged. Neither Alphabet (NASDAQ: GOOGL) nor Meta explained the shortfall, while Amazon explicitly cited insufficient chip supply from wafer foundries as a bottleneck. Nomura believes that as supply shortages intensify in 2027, the time lag between intent and execution will further widen, becoming the new normal.
Intel faces earnings pressure, PC market downturn exceeds market expectations
Intel's fourth-quarter revenue guidance of $15-16 billion fell short of market expectations of approximately $17 billion, and its stock price dropped 21% in after-hours trading following the earnings release. Nomura pointed out that the PC market downturn is an industry-wide issue: rising memory prices and supply shortages caused global PC shipments to decline approximately 20% year over year in the third quarter. Intel itself also faces company-specific challenges, including shortages in Intel 3 process and substrate supply, an accident at its Israel facility reducing server shipments by approximately $300 million each in the fourth quarter and the following quarter, and structural constraints making it difficult to rapidly shift PC capacity to servers. Meanwhile, AMD continues to gain share in both server and PC markets, and the Arm camp — including NVIDIA Grace/Vera, AWS Graviton, Google Axion, and others — is also eroding Intel's server CPU market.
Cash flow polarization, memory valuations severely suppressed
The core argument of Nomura's report is that diametrically opposite cash flow trajectories are forming between tech giants and memory manufacturers. Tech giants' free cash flow is theoretically expected to follow a "J-curve" — after the initial heavy asset investment phase is completed, substantial operating cash flow will follow. But for now, the negative free cash flow situation has only just begun, and the gap may further widen over the next year or two.
In contrast, for memory manufacturers, the starting point of large-scale shareholder returns has equally just arrived. Nomura expects shareholder returns from memory makers to multiply in the coming years, with cash reserves still rising substantially after considerable shareholder returns. Yet the market currently assigns the memory sector a 2027 forward P/E of only 2-3x, while the four major tech giants average approximately 20.9x (Microsoft (NASDAQ: MSFT) at 24.3x, Amazon at 21.7-23.3x, Alphabet (NASDAQ: GOOGL) at 18.5x, and Meta at 18.1x), representing a discount of 85-90%. Nomura believes current valuations imply an assumption that memory earnings have peaked, but given that supply shortages will persist until 2028 and long-term supply agreements continue to increase, the market's judgment on the sustainability of memory earnings is overly pessimistic, making the memory sector a rare safe haven in the current technology portfolio.
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