Following the Great Recession of 2008, the stock market became addicted to cloud computing. The new cloud computing infrastructure – the backbone of what has become known as software as a service (SaaS) – has fueled a profitability boom for early adopters. The growth of cloud computing is still alive and well and is expected to continue growing for the foreseeable future.
But after more than a decade of low capital expenditures on technology infrastructure thanks to the cloud, internet technology is changing again. Often referred to as “the metaverse”, data flowing across the web and in and out of the cloud is booming. Big Tech is leading the charge, with Metaplatforms (META -4.89%) including increasing his expenditure for this effort – and taking heat for it.
But Meta Platforms is not alone. Prepare for a resurgence in technology infrastructure spending by a number of companies in the coming years – and prepare to capitalize on metaverse equipment vendors.
Meta sacrifices big profits for capex, but it’s not the only one
Meta has wowed shareholders this year with profits that could be – were it not for CEO Mark Zuckerberg’s insistence on investing in the Metaverse. Purchases of goods and equipment (capital expenditure, or simply “capex”) were $9.4 billion in the third quarter, more than double the $4.4 billion in the same period last year. last year. Most of this spending spree is on data centers and associated chip equipment.
For the full year 2022, capital spending is expected to be between $32 billion and $33 billion before increasing to $34 billion to $39 billion in 2023. Meta says AI and data centers are driving of this capital expenditure boom. As Meta CAPEX grows, it’s really everyone investing for the Metaverse – basically, the next wave of web- and cloud-based innovation.
Alphabet (GOOGL -3.87%) (GOOG -3.79%) is investing heavily in data centers and artificial intelligence (AI) this year to support things like mobile camera search (Google Lens and DeepMind AI, for example). Its capital expenditure was $23.9 billion in the first nine months of 2022, a 31% year-over-year increase.
Amazonit is (AMZN -4.83%) total capex was $59.4 billion in the last 12 months, an increase of 14% over the same period last year. Operating expenses for AWS’ cloud segment specifically led the charge, jumping 32% in the first nine months of 2022.
Microsoftit is (MSFT -3.54%) spending was the lowest among big tech. Capex jumped 5% in the latest 12-month period, including an 8% year-over-year increase to $6.28 billion in the first quarter of fiscal 2023 (for the three months closed in September).
How should investors close the “capex gap”?
Other companies outside of big tech are also investing in new equipment that will support next-generation web technology. The bottom line here is that there is a huge boom in technology infrastructure. This puts pressure on the profits of the companies making the purchases, but it will be a tailwind for the suppliers.
Nvidia (NVDA -2.39%) is one of them. Although it has problems with its video game segment, data center sales have exploded. Nvidia data center sales increased 61% to $3.8 billion in the latest quarter. With tech giants increasing their investments in equipment, Nvidia has a lot more to gain in this department.
Qualcomm (QCOM -4.12%) could be another beneficiary, but not for the data centers themselves. Once the computing backbone of the future Internet is built, new mobile devices will be needed to take advantage of the metaverse. Right now, that means smartphones with a 5G mobile network chip. But later that could also mean augmented and virtual reality headsets (Qualcomm supplies the processors for Meta’s Quest VR devices). Qualcomm’s IoT segment, which houses AR/VR devices, grew 31% year-over-year last quarter to $1.8 billion.
Meta has become a recent punching bag for overspending on the metaverse, but it’s far from alone in investing in the future of the internet. For big tech shareholders, the process can be painful because it means deteriorating profit margins. But in the meantime, investing in metaverse vendors could help bridge the gap as they move from exploding capital expenditure on data centers, related equipment, and new device development.
Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Nicholas Rossolillo and his clients have positions in Alphabet (C shares), Amazon, Meta Platforms, Inc., Nvidia and Qualcomm. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Meta Platforms, Inc., Microsoft, Nvidia and Qualcomm. The Motley Fool has a disclosure policy.
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