Alphabet and Tesla shares fell last week after quarterly results showed rising capital expenditures and declining free cash flow. Microsoft, Amazon, Apple and Meta Platforms report earnings this week, facing the same question. MarketWatch columnist Michael Kramer notes that credit default swaps for many of these companies have widened notably, which may suggest credit investors are demanding more protection.
Alphabet and Tesla shares both took a hit last week after the companies' quarterly results, as investors soured on declining free cash flow and rising capital expenditures. Microsoft, Amazon, Apple and Meta Platforms report earnings this week, and Wall Street will be looking closely at free cash flow, capital expenditures and growth.
Among the tech giants, Apple has kept capital spending relatively restrained, while the others have seen capital expenditures soar and free cash flow decline.
Tesla's spending is modest next to the hyperscalers
Analysts expect Tesla to spend close to $22 billion over the next 12 months, still modest compared with Meta at $142 billion, Microsoft at nearly $180 billion, Amazon at $216 billion and Alphabet at almost $252 billion. Apple's capital expenditures are expected to stay relatively low, at around $13.4 billion.
The quarter just reported shows how fast those lines move. Alphabet's second-quarter capital expenditures jumped to $44.9 billion from $22.5 billion a year ago. Its free cash flow came in at negative $5.9 billion, compared with positive $5.3 billion a year earlier.
Credit investors ask for more protection
Many of these companies have increasingly tapped the capital markets to finance their artificial-intelligence infrastructure buildouts, and credit default swaps for many of them have widened notably. That may suggest credit investors are demanding more protection as debt issuance increases and capital spending accelerates, Kramer writes, or that they are reassessing the credit risk of these increasingly capital-intensive business models.
Following Alphabet's results and its announcement that spending would increase, its stock fell sharply and its CDS spread widened. If the other hyperscalers also announce higher capital spending while free cash flow continues to weaken, Kramer argues, investors may respond similarly.
Should capital spending keep accelerating while free cash flow deteriorates, he adds, it could become increasingly difficult for these companies to sustain the premium valuations they have historically enjoyed.
The risk could reach the chipmakers
Semiconductor companies depend on hyperscaler spending, so if those customers eventually slow capital expenditures because financing costs rise or free cash flow weakens, semiconductor demand could eventually feel the effects. Widening CDS spreads for Nvidia, Broadcom and AMD are particularly surprising, Kramer notes, because those businesses continue to generate strong and rising free cash flow.
Source: MarketWatch
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