The demise of big tech spending has been greatly exaggerated.
That may seem counterintuitive following last year's record-setting outlays and cautious guidance from some suppliers. Capital spending by Amazon.com (AMZN), Microsoft (MSFT), Google (GOOG) and Facebook (FB) alone totaled $77.7 billion for 2018—up 57% from the year before. It also somewhat contradicts outlooks from chip companies like Intel (INTC) and Nvidia (NVDA) that supply key components for the extensive cloud data-center networks deployed by those companies. Intel said on its most recent earnings call that cloud companies had "shifted from building capacity to absorbing capacity," and that orders might not resume until the second half of this year.
However, a closer look at those companies' stated plans in their recent quarterly reports suggest spending might not be so constrained. Amazon says it expects its investments to increase this year relative to 2018, particularly in the capital lease obligations that it assumes to build out its AWS cloud service. Amazon acquired $10.6 billion worth of property and equipment through capital leases last year, up 10% from the year before. The company's regular capital-expenditure bill rose 12% to $13.4 billion.
Ruth Porat, chief financial officer of Google parent Alphabet Inc. (GOOGL), said on the company's latest earnings call that overall capital-expenditure growth is expected to "slow meaningfully" this year. That comes after capital investments in the company's core Google business doubled to $25.5 billion in 2018, helped by significant expenditures such as its $2 billion purchase of the Chelsea Market building in New York City. But Ms. Porat added that the company still expects an "uptick" in purchases of equipment like servers used in data centers this year.
Facebook, meanwhile, expects more than an uptick. The social-network giant plans to shell out between $18 billion and $20 billion in capital expenditures this year compared with about $14 billion last year—a 36% jump at the midpoint. CFO David Wehner said the jump will be driven "primarily by our continued large investment in building data centers." Microsoft, whose fiscal year ends in June, hasn't yet broadcast its longer-term plans. But CFO Amy Hood said the company does see an increase in capex for the March quarter relative to the company's near-record $3.7 billion outlay in the December period.
More eye-popping bills may worry investors, but falling prices of some components such as memory could help Big Tech both moderate its bills, while still expanding its networks. RBC Capital estimates that memory makes up between 26%-30% of an average server's cost, and that average memory costs have fallen around 40% over the past six months.
Even Big Tech could stand to get more bang for its bucks.
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