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Thought of the day

Three major tech companies—Meta, Microsoft, and Alphabet, which have a combined market capitalization of over USD 9tr— reported their third-quarter earnings on Wednesday. Meta and Microsoft's shares fell in after-hours trading, after Meta pointed to increased spending that could crimp margins and Microsoft’s cloud growth did not exceed elevated investor expectations. Alphabet's shares rose, as the company posted a record quarterly revenue of over USD 100bn.

But Meta’s revenue and guidance were above market estimates, and Microsoft’s third-quarter revenue jumped 18% y/y. Without taking a view on single stocks, we view the latest set of tech results as positive for the structural growth of artificial intelligence (AI), as all three companies flagged a substantial increase in capital expenditures (capex) amid broad-based demand for AI and its infrastructure.

Higher capex should drive further AI momentum. Alphabet raised its full-year 2025 capex guidance again, adding that it expects a “significant increase” in capex in 2026 amid strong demand from cloud customers and growth opportunities across the company. Meta also highlighted higher investment growth, while Microsoft pointed to a 45% growth in capex for the 2026 financial year as it looks to increase its total AI capacity by more than 80%. Strong AI spending has been the biggest driver of AI performance so far, and the positive capex outlook should continue to underpin the AI-led rally over the next 6-12 months.

Scarce AI compute capacity should continue to benefit the semiconductor industry. Higher investment commitments from these big tech companies also underscore the scarcity of AI compute capacity, in our view. Microsoft said a shortage of compute capacity restrained the revenue growth of its cloud business, while Meta suggested that its compute needs have continued to exceed its own expectations, and that it will invest aggressively to meet those needs. As the industry continues to highlight surging consumption of AI tokens—the small units of data that large language models use to process and generate output—we believe the strong demand for computational resources should continue to benefit critical enablers such as chipmakers and foundries.

AI monetization picks up on rising cloud adoption. While held back by constraints in compute capacity, Microsoft’s cloud business still grew 40% y/y, while Alphabet’s cloud revenue growth accelerated to 34% y/y. Google’s Chief Business Officer also highlighted the growing monetization opportunities the firm sees as it invests in new AI tools. Overall, we continue to believe that the monetization potential for AI is large, even compared to the substantial capex plans. In the context of the USD 100tr global economy, we estimate that the annual AI revenue opportunity could reach USD 1.5tr.

So, we maintain our conviction that AI-related stocks should drive further equity performance and believe that underallocated investors should add exposure to the theme through a diversified approach.