tech industry capex

Cost-Cutting Surge: Tech Industry Slashes Capex to Fuel Remarkable Market Highs

In recent months, a wave of cost-cutting has swept through the tech industry, ushering in a surge in profits and stock values for major players. This trend has been particularly pronounced during the ongoing earnings season, with the Nasdaq Composite Index (^IXIC) soaring over 30% this year, defying gravity even as interest rates reach a 22-year peak. Companies like Amazon (AMZN) and Meta (META) have witnessed their shares skyrocket, prompting experts to question the role of drastic cost reductions in this remarkable ascent. At the heart of this rise lies a pivotal factor: the strategic slashing of capital expenditures (Capex). 

While the spotlight has often been on headline-making layoffs across the tech industry, the reductions in capex have been equally instrumental in shaping the financial landscape. Capital expenditures encompass long-term investments, spanning from infrastructure developments to intellectual property acquisitions, and serve as a bedrock for a company’s future growth and stability.

During this earnings season, the tech industry has laid bare the extent of these capex cuts, many of which have been unfolding over the span of months or even years. A prime example is Meta (META), which spent a staggering $7.75 billion on capex during the three months leading up to June 30, 2022. Remarkably, during the same period this year, that figure plummeted to $6.35 billion, as revealed by SEC filings.

Alphabet (GOOG, GOOGL) has also joined the ranks of capex cutters. Analysts noted that Google’s spending came in approximately $1 billion below expectations, showing a modest 1% year-on-year increase. This variance was largely attributed to real estate adjustments and deferred data center projects, as highlighted by Raymond James’ Simon Leopold.

Furthermore, semiconductor giant TSMC (TSM) made substantial reductions in its 2023 capex forecast, slashing it by up to $4 billion. The revised range now stands between $32 billion and $36 billion, a significant drop from the $36.3 billion spent in the previous year. Even rising star Rivian (RIVN), an electric vehicle manufacturer, revised its capex projections downward, signaling a shift in capital expenditure timing.

Nonetheless, the capex cut phenomenon is far from uniform across the tech sector. Microsoft (MSFT), for instance, exceeded capex expectations in the last quarter. Furthermore, some analysts speculate that the ongoing AI boom could potentially reverse this trend and drive capex numbers back up.

Piper Jaffray’s Harsh Kumar highlighted the possibility of a “gen AI bubble forming,” as capex forecasts often hinge on projected workloads that incorporate a multitude of startups, not all of which are likely to survive. However, this shift towards capex reduction inevitably raises concerns about the long-term innovation capacity of these tech giants.

Jason Tauber, the managing director at Neuberger Berman, however, downplays the long-term effects of capex cuts on innovation. He likened this phase to the ‘year of efficiency,’ a response to the aftermath of the COVID-induced tech bubble, characterized by over-hiring and excessive spending. This belt-tightening approach is believed to be a reaction to the increased investor demand for demonstrable GAAP EPS and free cash flow figures.

Presently, both Meta and Alphabet have experienced substantial year-to-date gains of 152% and 65% respectively, while Rivian, despite facing significant challenges last year, has managed an 18% increase in its stock value this year.

In the short term, Wall Street seems to favor these capex cuts, with investors rejoicing at the financial benefits they bring. Should Tauber’s perspective hold true, concerns about their long-term impact on innovation may be premature. As the tech sector adapts and restructures its investment strategies, the industry’s ability to balance profitability with future growth will undoubtedly be under continued scrutiny.

Source: Yahoo Finance

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