Richard Clode on Tech CapEx: Early Days for Generational AI Investment

Cloud Growth and AI Investment

• 💡 Microsoft is trading near its all-time high, driven by cloud growth estimated at 34% year-over-year, with expectations of further acceleration.
• 🚀 The installation of thousands of AI racks per week by major US hyperscalers is expected to meet strong cloud demand.
• 🎯 Meta is investing deeply in AI and data centers, moving beyond its 'year of efficiency,' with expectations of significant capital spending.

AI Use Cases and Capex Confidence

• 🧠 Alphabet's processing of 980 trillion tokens, up from 480 trillion, indicates a shift towards using AI technology rather than just training models, boosting confidence in capex.
• 💰 Companies are increasing capital spending due to an ongoing AI 'arms race,' with significant funding rounds for AI startups like Anthropic and OpenAI.
• 📈 Tax reforms are a significant benefit, allowing companies to expense up to 100% of capex and R&D domestically, thereby increasing free cash flow for further investment.

Market Signals and Future Outlook

• ⚠️ While some mixed signals exist, such as ASML's uncertainty about growth, the overall trend suggests continued investment in AI infrastructure.
• 📊 The current AI innovation curve is considered very early, with large addressable markets and new use cases emerging.
• ⏳ The situation is compared to the early days of the internet, suggesting that the current wave of technological innovation and associated capital expenditure is far from its peak.