Everyone is afraid that technology companies are spending too much. But Evercore analyst Mark Mahaney notes that a host of internet companies are starting to show that they are earning a return on the spending-making their stocks look compelling.
Capital spending in the hundreds of billions, and scary headlines about it have contributed to the market's angst about companies such as Meta Platforms, Amazon.com, Alphabet, Microsoft, Oracle, and other prominent tech names. Their stock price performances have been spotty, with Oracle, Meta and Microsoft down for the year, versus the S&P 500's 13% 2026 advance.
Amid growing market concerns about the AI revolution, Mahaney highlights the handful of companies that showed on their second-quarter results that they have started to turn the corner on generating a return on the spending.
"We are in the midst of a recovery in high quality 'net stocks, thanks in part to very strong ROAI [return on AI] results & successful product cycles in the Q2 prints," Mahaney writes.
Let's start with the one everyone wants to wrap their minds around: Meta Platforms. While the stock dropped 8% the day after reporting its late July earnings-investors remained perturbed by a further increase in capex spending-CEO Mark Zuckerberg and company are demonstrating early signs of improved return on investments. And the shares have bounced back.
For starters, Meta's increased its 2026 capital expenditure guidance by only 1.9% to $137.5 billion. Sure, that's almost double last year's figure, as the company builds out data centers and buys chips to support its AI assets, but investors have known a big increase was coming for a while. On top of that, analysts forecast 22% annualized growth of capex in the two years after 2026, according to FactSet, dramatically slowing the growth rate. This would position the company to boost profit margins down the road.
We shouldn't forget that Meta's second-quarter revenue grew 28% from a year earlier to $60.8 billion, aided by artificial intelligence. The primary drivers were higher advertising prices and more ad impressions. Meta is using AI to show curated ads to each user, which increases engagement and boosts brands' return on ad spending.
Meta's What'sApp unit is still in the early days of using AI as a helper to better monetize its users. WhatsApp's paid messaging and subscription revenue primarily drove a 73% increase in "other revenue."
There's more. "We're getting a lot of offers for compute at a significant premium over what we paid for it, and we have more coding and productivity tools on our road map," Zuckerberg said on the call. Essentially, Meta can generate profits from its AI investment to improve returns if needed.
"The question is whether it [META] can deploy AI to create "non-core" products, services and monetization opportunities," writes Mahaney. "We believe this is a reasonable probability, with the odds materially greater than what is implied in the stock's current valuation."
Meta's valuation is roughly 17 times next 12 months earnings, near the low end of the range in the AI era, which began in earnest in 2023. It's well below the S&P 500's just over 20 times, whereas Meta usually trades above the index because it can grow earnings faster, which will eventually help reduce its large liabilities.
Amazon.com is at a "fundamental inflection point," Mahaney writes.
Yes, the company lifted 2026 capex guidance by 10% to $220 billion, but CEO Andy Jassy emphasized that is because of greater memory costs. Those notoriously fluctuate, but the company isn't drastically expanding the scope of its data center investments more than the market had anticipated. Meanwhile, Amazon's earnings-per-share result for the quarter surpassed estimates, driven by higher-than-forecast sales and margins, even excluding the one-time gain from its Anthropic investment.
Amazon Web Services, the cloud business that's supposed to benefit from the capex, saw growth accelerate to 37% from 17% in last year's second quarter.
Other companies Mahaney flags as having maintained strong sales growth-making the returns on AI spending look appealing-are Airbnb and Shopify. The latter saw gross merchandise volume-the total amount of spend on the platform before Shopify's cut-grew 32% to $115.6 billion, which helped it expand its free cash flow margin, as capex barely changed.
The debate over when the massive AI investment will pay off won't be settled for some time. If you wait until then to place your bets, it will be too late.
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