Key insights
- The author argues that hyperscaler capital expenditures by large-cap tech firms (MAG7) may lead to lower ROE/ROA and FCF-based valuations due to the fixed-asset intensive nature of the business. Execution delays, geopolitical risks (China rare earth control), and potential competition from China (Deepseek) could further pressure US equities, warranting a rotation to Asian and emerging markets.
The Ai boom has been very exciting, we are seeing an unprecedented boom in the demand for data centers, energized assets, semiconductors, storage and more. The size of these projects have led to some blue chip large caps like AMZN, MSFT, META, ORCL, GOOG committing hundreds of billions in capital expenditure to build and/or rent infrastructure and become “hyperscalers”. NVDA has had a field day at the back of it, but talks of circular trade with OpenAi, over leveraging and restricted redemptions by private credit funds have brought jitters to the hyperscaler business model. I gather that execution delays are the main stress point, whether they arise from time to permitting, rare earth control by China or war related logistic concerns. These delays are worrying the lenders, probably even NVDA shareholders and sovereign funds who have sizable investments in US large cap tech. Even if the execution of these hyperscaled data centers takes place without default and with OpenAI being able to meet its commitment, it will still leave us with expensive data centers, whose economics would have been dampened. It’s noteworthy that hyperscaling is a fixed asset intensive business and its revenue scalability is relatively limited when compared to the high scalability of AMZN, MSFT, META, ORCL, GOOG’s traditional services, therefore the valuations of MAG7s will face a drop on the ROE & ROA metrics, possibly down rating their free cash flow based valuations. This will impact the S&P and further Deepseek type surprises from China can add to that pressure. This warrants a lightening in US equities and perhaps rotating to Asian and emerging markets.
Not financial advice, it’s a note I’m writing for my kids to whom I’m grooming for global investing. I thought it might spark and interesting debate on this forum. Would appreciate objective feedback.