Big tech earnings are in after Meta Platforms (META 9.73%), Alphabet, Amazon, and Microsoft all delivered their quarterly reports Wednesday afternoon, and there was a clear theme.
AI spending continues to rise, and the big hyperscalers are upping their capital expenditure forecasts for the year while cloud computing revenues are soaring.
Google Cloud reported 63% growth. Microsoft Azure was up 39%, and Amazon Web Services delivered 28% growth.
The news confirmed that the AI boom remains in good health and is even accelerating, given the improving growth rates in cloud computing. With AI spending heating up, there are a number of winners across the semiconductor sector, but Nvidia (NVDA 4.55%) may be the most obvious one. The data center GPU leader is a major supplier for all of the hyperscalers, and it’s likely to be a significant recipient of the increased capex, especially with its new Rubin platform scheduled to come online in the second half of the year.
However, one comment from Meta Platforms CEO Mark Zuckerberg was particularly promising for Nvidia and its peers.
Image source: Getty Images.
What Zuckerberg had to say
Meta itself delivered strong results in the first quarter, with revenue jumping 33%, fueled by a 19% increase in ad impressions and a 12% increase in average price per ad. However, the stock still fell as the company hiked its capital expenditures forecast for the year from $115 billion-$135 billion to $125 billion-$145 billion as investors seemed skeptical of those plans.
Zuckerberg clearly explained why that increase was needed. Discussing the higher capex forecast, Zuckerberg said, “Most of that is due to higher component costs, particularly memory pricing, but every sign that we are seeing in our own work and across the industry gives us confidence in this investment.
That $10 billion increase in spending won’t all go to chips necessarily, but much of it will, and Nvidia and Micron (Nasdaq: MU) look set to be two of the biggest winners.
Higher prices are also a better way for these chipmakers to grow revenue than increased capacity because higher prices translate into higher margins, and we’ve already seen gross margins boom for both companies. Finally, the increase in forecasts shows that it still seems relatively early in the AI investment boom. Alphabet, for example, said it would spend significantly more on capex in 2027, and other big tech companies are likely to follow.
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Chip stocks still look cheap
The performance by the big tech cohort shows why chip stocks have soared and also explains why SaaS stocks have gotten hit so hard. There are plenty of cheaper alternatives in the tech sector that are growing just as fast or faster than high-profile SaaS stocks. It’s hard to justify buying a SaaS stock at 20 times sales when Meta just reported 33% revenue growth and trades at a price-to-earnings ratio of just 24. Similarly, the same could be said of the top chip stocks.
Nvidia trades at a price-to-earnings ratio of 43 despite growing at 73% in its most recent quarter, while Micron trades at a P/E of 24 and is growing even faster. It’s true that those growth rates might be less consistent than you’d find in software, but the bias against chips and “Magnificent Seven” stocks like Meta still looks like an opportunity.
Semiconductor stocks have historically been cyclical, and investors still seem skeptical that this kind of growth can continue. However, based on the capex commentary from Meta and its peers, investors should expect it to accelerate and they could see several more years of strong growth.
Jeremy Bowman has positions in Amazon, Meta Platforms, Micron Technology, and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Micron Technology, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
