Since the concept of AI hit the mainstream, trillions of dollars have flooded into the names deemed as AI winners and the recipients have wasted no time in spending their cash flows in keeping at the forefront of their fields. Such was the pace of advancements in AI and the data centre and power requirements to fulfil the demands of a data hungry world, those companies at the forefront saw the requirement to commit ever increasing sums to the field, and previously were richly rewarded for doing so, but has this finally reached tipping point?
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Richard Scrope
Fund Manager
To spend or not to spend.
Is $1 trillion in 2027 affordable?
The market expectations for 2027 capital expenditure by the largest four hyperscalers has recently increased from $824 billion to almost $1 trillion after Alphabet announced its intentions to spend between $195 -$205 billion in the coming year and to increase it in the following years. Jensen Huang, who probably has a better insight than most, given the order book for Nvidia’s GPUs, was seen as overcooking the number when he announced that he expected the capex to reach $1.5 trillion next year, but all of a sudden, the number does not appear so fanciful.
The co-founder of Google, Larry Page, saying that “I’m willing to go bankrupt rather than lose this race” has suddenly raised concerns about the sums being pledged, and whether there will ever be a return on investment to justify these commitments. In the last quarter, Alphabet posted its first ever quarter of negative free cash flows, and increasingly, even the Hyperscalers, who once had cash balances larger than the GDP of many countries, have had to approach the bond markets to find the cash required to keep up with their peers.
The tide, however, appears to be turning, and the market seems unwilling to accept the huge sums being committed, while simultaneously penalising the same companies for not spending enough to keep up in the race. Management teams have a tight rope on which to walk without upsetting investors when updating the market in the coming weeks, and should returns on investment not be visible then patience may start to run out.
While the market still believes that these investments will prove worthwhile, we are likely to see further quarters of negative free cash flows from the hyperscalers and further tapping of the debt markets. Noticeably Apple, who has been hesitant to follow its peers into this arms race, partly due to their problems in adapting Siri into an AI agent, but also owing to the troubled relationship with Open AI, eventually partnering with their erstwhile competition, Google, has started to outperform. While once they were penalised for not spending enough, now they are being rewarded for not doing so, and the company has regained its spot as the largest company in the world by market capitalisation.
Whether we are at the tipping point in the AI trade remains open to question, but what is noticeable is that the market is no longer solely focussed on AI, and other sectors have seen a pick-up in interest.
This widening out of the market, which has been lacking for multiple years, is positive for active fund managers, especially those who continue to look at cash flows and companies that continue to invest within their means.
While the VT Tyndall Global Select Fund continues to hold positions in Microsoft and Amazon, only Apple features in the top 20 positions within the Fund.
Data source (unless otherwise stated): Bloomberg
Disclaimer
WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not