In a recent development, a wave of cost-cutting has surged across the tech industry, yielding substantial profit upswings and driving stock values to new heights among major players. This trend has emerged prominently during the ongoing earnings season, where the Nasdaq Composite Index (^IXIC) has defied expectations by surging over 30% this year, even in the face of soaring interest rates reaching a 22-year peak. Remarkably, companies such as Amazon (AMZN) and Meta (META) have experienced meteoric rises in their shares, prompting experts to scrutinize the implications of aggressive cost reduction measures. Central to this impressive financial surge is the strategic reduction of capital expenditures (capex).
While layoffs have dominated discussions, capex cuts have played an equally vital role in shaping the economic landscape of the tech industry. These capital expenditures encompass long-term investments, ranging from infrastructure expansions to intellectual property acquisitions, providing a foundation for sustained future growth and stability.
Throughout this current earnings season, the tech industry has revealed the magnitude of capex reductions, some of which have been in progress for extended periods, spanning months or even years. A striking illustration comes from Meta (META), which invested a staggering $7.75 billion in capex over the three months preceding June 30, 2022. Astonishingly, during the corresponding period this year, that figure underwent a remarkable plunge, plummeting to $6.35 billion as disclosed in SEC filings.
Alphabet (GOOG, GOOGL) has also adopted capex reductions. Analysts observed that Google’s expenditures fell roughly $1 billion below projections, representing a modest 1% year-on-year growth. This variance predominantly stemmed from real estate modifications and postponed data center initiatives, clarified by Raymond James’ Simon Leopold.
Additionally, semiconductor titan TSMC (TSM) has significantly slashed its 2023 capex forecast, curtailing it by up to $4 billion. This adjustment has narrowed the capex range to $32 billion-$36 billion, signifying a substantial decrease from the $36.3 billion spent the previous year. Even emerging player Rivian (RIVN), a manufacturer of electric vehicles, has recalibrated its capex projections, signaling a strategic shift in capital expenditure timing.
However, the capex cut phenomenon is far from uniform within the tech industry. Microsoft (MSFT) notably exceeded capex projections in the previous quarter. Furthermore, analysts speculate on the potential for an artificial intelligence (AI) boom to counteract the capex reduction trend, potentially driving these figures upward again.
Harsh Kumar of Piper Jaffray highlighted the prospect of a “gen AI bubble forming,” noting that capex forecasts often hinge on workload projections that encompass numerous startups, not all of which may survive. Nonetheless, this wave of capex reduction raises legitimate concerns about the long-term innovation potential of tech giants.
Managing Director Jason Tauber of Neuberger Berman, however, downplays potential long-term innovation setbacks stemming from capex cuts. He likens this phase to the ‘year of efficiency,’ a response to the repercussions of the COVID-induced tech bubble marked by over-hiring and excessive spending. This strategy appears to be a reaction to investor demands for solid GAAP EPS and free cash flow figures.
In the present landscape, both Meta and Alphabet have impressively gained 152% and 65% year-to-date, respectively. Notably, Rivian, despite grappling with substantial challenges the previous year, has recorded an 18% increase in its stock value this year.
For the time being, Wall Street exhibits a favorable view of these capex reductions, with investors celebrating the resultant financial benefits. If Tauber’s perspective holds true, concerns about the long-term impact on innovation might be premature. As the tech sector navigates evolving investment strategies, the delicate equilibrium between profitability and future growth remains a subject of continuous scrutiny.
Source: Yahoo Finance
