To The Moon

Building the infrastructure for AI is still very much a work in progress. Capital expenditure at Microsoft , Meta , Alphabet and Amazon reached a combined $60 billion in the third quarter. But companies warned that the spending is not going to end anytime soon.

I am writing this article to examine whether Nvidia can continue to win with more orders as Big Tech AI Capex spending cycle does not seem to show signs of slowing down.

I am holding onto my position in Nvidia as I expect Nvidia to make a move towards the $155 if the sales order booked with AI Capex cycle translate to revenue for the reporting quarter.

$Microsoft(MSFT)$ forecast second-quarter 2025 Azure revenue growth of 31% to 32%; Capital expenditures rose 5.3% to $20 billion;

$Amazon.com(AMZN)$ reported $22.6 billion in capex in the third quarter 2024, up from $12.5 billion in the same period last year.

$Alphabet(GOOGL)$ spent $13.1 billion on capital expenditures (capex) in the third quarter of 2024, which was a 62% increase from the same quarter in 2023. Alphabet expects to spend the same amount in the fourth quarter, which would bring the total capex for 2024 to $51.4 billion, up 59% from 2023.

$Meta Platforms, Inc.(META)$ capital expenditure (capex) for the 2024 fiscal year is estimated to be between $38 billion and $40 billion, which is an increase from its previous estimate of $37 billion to $40 billion.

Increased Demand and Engagement Due to AI Investments

If we looked at these CAPEX spending positively, cloud providers are beginning to see increased demand and engagement due to their AI investments. Some are also benefiting from lower costs as they deploy AI tools internally. Alphabet said 25% of its code is now generated by AI.

In a recent report, UBS estimated that the current investment phase will continue through 2027 and that AI spending would dwarf general-purpose cloud infrastructure. The fact that capex spending does not appear to be slowing down is great news for the companies supplying chips and other hardware to data centers - i.e. $NVIDIA Corp(NVDA)$ , Broadcom, AMD, TSMC and others.

But why would Nvidia win more than the others?

Data Centre Chips Supply. Margins Is Important

The sector has become a lot more competitive and capacity has increased over the last two years. This is less of a problem for Nvidia, which has a very strong competitive advantage. But, the companies that supply more generic equipment will struggle to maintain margins.

Super Micro Computer (which supplies servers) is now embroiled in an accounting scandal - but its margins were already under pressure before that story broke.

We also need to understand that hardware like chips used in GPUs and servers, these assets normal depreciation period is over the next five years, so these depreciation charge is recorded as a non-cash expense on the income statement, so it reduces net income.

In Q3 last year, Microsoft’s total depreciation and amortization expense was $3.9 billion. This year it was $7.4 bln in Q3. As Microsoft and the other cloud providers continue to invest in data center capacity, they’ll be recording increasing depreciation charges. These charges can be barely noticeable when revenue is rising, or when other cost increases are low. But they could have a big impact if revenue growth stagnates.

If we looked at the other side when theses assets are fully depreciated, they have no more impact on earnings, but they can still provide value to the company. This can lead to a delayed improvement in margins.

This would mean good news for Nvidia because there will be technology refresh project as capital expenditure is a necessary part of investing in future growth, but we need to understand the importance to anticipate the effect on earnings.

Capex cycles can also create opportunities if the hit to earnings results in lower share prices. This happened to Amazon a few years ago when investments in warehouses hit its margins. In Q3, Amazon reported a record net income margin of 9.65%.

Nvidia Highly Concentrated Revenue Coming From Big Tech “Out-Invest” Spenders

A lot of the Capex (capital expenditure) spent by Big Tech companies is going straight to Nvidia, which has huge concentration risk as a business. 5 companies account for ~45% of Nvidia’s revenue (Microsoft alone is ~20%). Can this Big Tech giants design and develop their own chips?

So far, we have seen some of these big tech making plans to design and develop their own chips, but due to the time to capture the market is important, we have seen these Big Tech placed order on Nvidia new Blackwell chips?

So the question is whether these Big Tech would continue to spend?

Speaking of Capex, Big tech companies invest hundreds of billions of dollars in capital expenditures (Capex) every year. Big Tech Capex in the last 3 years have surpassed that from the Big Oil companies (huge spenders in their own right).

Difficult to see how other tech companies catch up to the Big Tech in the high interest rate environment. (Yes, OpenAI did it, but the Microsoft owns a chunk of it),

But we have seen rate cut in November, so if rate cut continues, there is a possibilities that Big Tech could continue to spend big money to beef up their AI investments.

This morning (18 Nov), we have Bloomberg reporting that financial institutions are also going to increase their spending on AI. So it would be important for us as investors to watch how much of that would goes to Nvidia for the hardware and software side.

Technical Analysis - MACD and Multi-timeframe (MTF)

If we have been following how NVDA have been trading since last week after the post election rally, it has been trading range-bound, and looks like it is consolidating before its earnings result this week.

We saw a dip on Friday, and we are already seeing some upside movement in the 24-hours trading, will this trend continue into the pre-market? Looking at the volume, we need to see a significant confirmation.

On the MACD side, it looks like it might try to make a new reversal, but looking at MTF, there is some hopes of a small upside before its earnings, because the news of blackwell chips heating up does not seem to have much large impact on the stock price yet.

I think we can continue to monitor this stock as the Big Tech spending on CAPEX should reflect well on NVDA upcoming earnings.

Summary

With rate-cut in November and now December rate cut is indecisive, but Big tech CAPEX spending should be already budgeted, so we might see these being reflected in NVDA upcoming earnings, and there is no signs of slowing down, this means that we are going to see more companies spending CAPEX on AI related hardware or projects.

Nvidia should be able to benefit from these development.

Appreciate if you could share your thoughts in the comment section whether you think Nvidia would be able to benefit with the no signs of AI CAPEX spending cycle slowing down.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.