Can hyperscalers justify their huge AI capex?
This report is taken from this week’s Tech Download newsletter. As you see? You can subscribe Here.
Sunflower seed
Earnings season has seen endless spending commitments from tech companies as they try to increase data center capacity amid the artificial intelligence boom.
Hyperscalers, including Amazon, Microsoft, Meta And Alphabetannounced that capital spending on artificial intelligence could reach $700 billion this year; This is more than the GDP of countries such as the United Arab Emirates, Singapore and Israel.
Investors got nervous. Shares fell last week as more than $1 trillion was wiped from the market value of Big Tech companies amid concerns about the extent of AI spending and questions about returns.
Although there has been some improvement this week, uncertainty regarding astronomical AI spending continues to unsettle the public.
Amazon’s largest AI data center has seven completed buildings, with a total of 30 buildings planned on 1,200 acres in New Carlisle, Indiana, on October 8, 2025.
Erin Black
AI betting becomes ‘straight’
“2026 represents a 60% overall increase in committed capex over the prior year,” said Michael Field, chief equity strategist at Morningstar.
“At a certain point, this bet becomes binary: either demand and monetization follow and cover the spend, or it doesn’t and businesses fail,” he added. “Investors were comfortable when there were side bets, but they are much less comfortable when the entire business is at risk.”
Hyperscalers’ capex will consume nearly 100% of cash flow from operations this year, according to a note from UBS this week. This rate is 40% on average for 10 years.
Bob Savage, head of market macro strategy at BNY, told me that investment spending isn’t as much of a concern as where the money comes from.
“If this increases the net debt of mega-cap companies, it takes away from equity assets,” he said. “As Oracle has shown, investors are happy to buy debt, but the problem is that it reduces free cash flow and, for some, puts balance sheets at risk.”
earlier this month Seer It has announced plans to raise $45 billion to $50 billion in the 2026 calendar year, and Alphabet plans to raise $20 billion from a U.S. dollar bond sale, people familiar with the matter told CNBC on Monday.
Upside on hyperscaler stock
Despite market volatility, many analysts are still generally bullish on hyperscaler stocks.
“The returns for the main data center builders (Amazon, Microsoft and Google) are already positive because they pre-sell all their capacity before they even build the data center,” said Gil Luria, head of technology research at DA Davidson.
He added that further increases may come in the future. “Like [AI] “As usage increases exponentially, consumers and businesses will be willing to pay more for the value created, we expect positive returns to be realized.”
But timelines for recouping major capital expenditures are “not very well known” at the moment, Field told me. “The estimated useful life of many of these expenses, including data centers and chips, can be as low as 3-5 years, meaning hyperscalers need to achieve significant investment returns before 2030, providing a very tight timeline.”
To ease concerns, Field said hyperscalers need clear timelines on payback periods and “reliable” strategies for making money.
Until that happens, investors will likely continue to avoid further plans to increase capital spending, which could cause further market jitters in the coming months, he added.
Latest updates
Alphabet returns to the debt market to finance it Development of artificial intelligence could generate $185 billion in capital expenditures this year, it has been reported.
Elon Musk’s xAI lost two co-founders in two days Researchers Jimmy Ba and Tony Wu announced that they are leaving the company.
USA offers to carry 40 percent Taiwan’s semiconductor supply chain It is “impossible” to reach its shores, Taipei’s top tariff negotiator said in an interview on Sunday.
Apple had its worst day on the stock market since April on Thursday, after reports emerged of Siri-related delays and as the company’s news app faces regulatory scrutiny.
Anthropic completes $30 billion financing round The company announced Thursday that it has raised $380 billion at a post-money valuation, making it the second-largest private technology raise in history.
Chart of the week
With geopolitical tensions between Europe and the US reaching boiling point in recent weeks after Trump refused to use force to seize Greenland before backing down, questions about the region’s digital sovereignty, or lack thereof, have resurfaced. The data paints a very clear picture.
