Although they are among the world’s most profitable companies and have strong balance sheets, the immense spending on various AI investments from the hyperscalers in the Mag 7 has been scrutinized.
This includes Amazon AMZN, Alphabet GOOGL, Meta Platforms META, and Microsoft MSFT, which are building and operating massive global-scale cloud infrastructures that are needed to run AI models and huge data workloads.
There is no doubt that “hyperscaling” is the only way to run AI, cloud, and data-intensive services at the ultimate speed and accuracy that is now expected, but investors have started to ponder whether these companies are overspending on questionable and value-destroying projects.
Outside of valuation, this has brought about the need to analyze the capital efficiency of the Mag 7 hyperscalers, particularly return on invested capital (ROIC). To that point, ROIC illustrates the ability to return invested capital into profits and is one of the clearest indicators of long-term shareholder value.
Notably, the Mag 7 hyperscalers are all expected to exceed $100 billion in annual capital expenditures for AI-related infrastructure by 2026.
At the moment, the highest single-year CapEx figure currently goes to Microsoft. The software giant is now projected to spend $80 billion on data centers this year and has seen its trailing twelve-month CapEx balloon to over $69 billion.
Image Source: Zacks Investment Research
With Microsoft being the prime example of extremely elevated CapEx levels, its ROIC has actually stabilized and remained flat over the last few quarters after noticeably declining in recent years to 23% although this is still above the admirable level of 20% or higher.
Image Source: Zacks Investment Research
Surprisingly, Meta, Alphabet, and Amazon have seen an increase in ROIC, suggesting the market’s worries about their increased CapEx may be overdone, at least for now.
Amazon’s sharp uptick has certainly been reassuring as its ROIC has edged closer to 20% with Meta at 29% and Alphabet having the high at 31%.
Image Source: Zacks Investment Research
Magnifying the promising rise in ROIC, Amazon’s increased profitability is standing out the most. Benefiting from a pleasant trend of positive earnings estimate revisions, it’s noteworthy that over the last 60 days, Amazon’s FY25 and FY26 EPS estimates are still up over 4% and 2% respectively, as shown below.
Image Source: Zacks Investment Research
While Alphabet has experienced an even sharper uptrend in EPS revisions, this appears to have already been priced into its stock, with GOOGL spiking over 20% in the last three months.
