TOKYO - Investment by major US technology companies in artificial intelligence and data centers continues to support strong earnings expectations for semiconductor suppliers, but shrinking free cash flow and Oracle's exceptionally rapid expansion are raising questions about whether the spending boom can be sustained.
Market attention has recently focused on volatile memory-chip prices and semiconductor stocks. However, the more important long-term issue is whether hyperscalers are investing too heavily in infrastructure, a concern that had dominated discussions during previous earnings seasons.
Earnings forecasts for semiconductor companies, including memory manufacturers, have continued to improve after a brief slowdown. The latest estimates indicate that the sector's expected growth rate is again rising sharply.
Sales and net profit could therefore continue expanding at a pace that exceeds conventional expectations. The strong outlook is being driven largely by spending from five major hyperscalers: Alphabet, Amazon, Meta Platforms, Microsoft and Oracle.
These companies are investing enormous amounts in data centers, creating demand not only for semiconductors but also for electrical cables and other infrastructure. As long as their capital expenditure continues to rise, demand throughout the data center supply chain is likely to remain firm.
For that reason, capital expenditure figures have become more important to investors than the companies' headline earnings numbers. Continued growth in investment could support semiconductor and infrastructure-related businesses even when their share prices decline.
The combined expected capital expenditure growth rate of the five companies remains high, indicating that the investment cycle has not yet peaked. Alphabet, Amazon and Microsoft account for particularly large absolute amounts, while Meta has also increased spending.
Oracle's capital expenditure appears smaller when compared directly with the other companies, although it has still exceeded 50 billion dollars. The apparent difference reflects the unusually large spending by the other hyperscalers rather than a low level of investment by Oracle.
Measured against its level five years earlier, Oracle's capital expenditure has increased by several dozen times. Spending by the other four companies has also grown substantially, generally reaching about five times its previous level.
Oracle's unusually fast expansion reflects its late entry into the data center investment race. The company was historically one of the world's leading database software providers and a major technology company during the information technology boom.
Its database systems helped companies replace paper files stored in cabinets with digitally managed information. The business became essential corporate infrastructure, but as the technology matured, it developed into a stable field with less potential for explosive growth.
Oracle consequently moved to expand its data center operations as it sought new sources of growth and attempted to catch up with larger cloud computing rivals. Its strategy explains the dramatic increase in capital expenditure, although the speed of the expansion distinguishes it from the other hyperscalers.
Assessing whether such investment is appropriate requires examining companies from both flow and stock perspectives.
Free cash flow is one of the main indicators used to evaluate investment. It generally represents the cash remaining after capital expenditure is deducted from cash generated through business operations. The money can then be used for purposes such as dividends or debt repayment.
The stock perspective focuses on the balance sheet. Net interest-bearing debt is calculated by subtracting cash and other financial assets from borrowings and other interest-bearing liabilities.
A net debt-to-equity ratio can then be calculated by dividing net interest-bearing debt by shareholders' equity. This allows companies of different sizes to be compared by showing how much debt they hold relative to their net assets. A higher ratio generally indicates greater financial risk.
Free cash flow and net debt are therefore important measures of whether capital expenditure remains sustainable. Free cash flow shows how much money a company is consuming during a particular period, while net debt indicates whether it is relying heavily on borrowing to finance investment.
Combined free cash flow at the five hyperscalers has fallen to almost zero as their capital expenditure has surged. It has not yet turned negative, suggesting that the companies are still broadly financing their investment with cash generated from operations.
Their businesses also continue to record solid growth. On that basis, the current spending may still appear financially manageable, particularly if the companies moderate investment before free cash flow moves deeply into negative territory.
The figures nevertheless show that the margin of safety has narrowed considerably. The overall condition of the investment boom cannot be judged from the combined total alone, making it necessary to examine the financial position of each company separately.
Source: テレ東BIZ
