Aggressive capex, driving away the stock god

In the past few days, besides the Japanese Yen Carry trade, the second major event is Warren Buffett's significant reduction in Apple holdings. When he reduced his holdings by 11% in the first quarter of this year, the stock god said it was due to high taxes. However, what surprised the market was that in the second quarter, the stock god further reduced 400 million shares, reducing his holdings from 789 million shares to about 400 million shares, selling half of his Apple shares. The original reason for selling should no longer be tax-related but rather due to other reasons.

As for the specific reasons, there are many speculations in the market. Duan Yongping believes that Buffett's actions are not surprising, as it can be said that the current valuation is high, or that the stock god has better opportunities.

Setting aside various conspiracy theories, the reason could be that Apple has reached the stock god's psychological price, and the upcoming AI wave story may exceed the stock god's "circle of competence" because major tech companies are increasing their capex. Although Apple's capital expenditure is not among the highest in the tech industry, it may have to increase its capital expenditure in the future. The uncertainty lies in the future profit level, especially considering Apple's recent significant increase in stock price. When the mid-term logic changes, the stock god may consider reducing his holdings.

Another market speculation is that the stock god may believe that current tech stock valuations are too high. He is also reducing his holdings in US banks, leading to Berkshire Hathaway's cash reserves reaching $276.9 billion. The market speculates that this indicates a judgment on the upcoming interest rate cuts and a tech stock pullback. Is the cash being raised to prepare for buying opportunities?

It is indeed interesting to reduce holdings at this stage, selling when there is a lot of buzz. By combining recent news, one can speculate on what the stock god might be thinking.

I. The big cycle of tech stock capex

Duan Yongping mentioned that Buffett's statement that Apple will likely remain the largest holding until the end of this year implies that he intends to continue selling, but not completely unless there is a special reason. The reason is to avoid the market downturn. Therefore, with Apple's stock price surging since May, this can be considered a special reason. There are only two possibilities: a significant drop due to special circumstances, in which case selling is necessary for self-preservation, or the market sentiment is good enough that Buffett's significant reduction will not affect the market.

In fact, this is true. Looking back at Apple's stock price trend in the second quarter, who would have expected the biggest buyer of Apple in recent years to significantly reduce holdings?

So, looking back at why Apple started to surge from May, the main reason is that Apple began to increase its Capex to invest in AI, accelerating its efforts in Apple Intelligence. Over the past year, Apple and Tesla have been criticized by some investors for not investing enough in AI. In fact, these two companies are the slowest among the tech giants in AI deployment. Therefore, in the past period, their stock prices have lagged behind the other tech giants. Although they did not decline, their growth rates were behind, and even Apple and Tesla in the first quarter of this year had a phase of underperformance compared to the S&P 500. This is the first time since 2020 that these two companies have encountered such a situation When Apple increases capex to invest in AI, it means that the future growth logic is changing.

As we all know, Buffett doesn't really invest in tech companies, especially in the early stages of a new technology. Buffett has hardly invested in such companies, and AI is clearly in its early stages now. Although Apple has a strong moat in hardware, the future development of AI and whether Apple will be a winner in AI are uncertain.

In other words, according to Buffett's concept of "circle of competence" investing, if Apple continues to increase capex in the future, it is uncertain when AI will generate returns.

If AI becomes a new growth curve in the future, the profit level is also unpredictable. More importantly, Buffett values Apple's cash flow level. As mentioned before, although Apple's revenue growth in the past few years is not the fastest among the big tech companies, relying on the increasing amount of buybacks each year, Apple is the best-performing tech stock between 2019 and 2024.

So, how many years will this round of AI capex cycle last? What are the chances of Apple winning? Obviously, the logic in the next few years is starting to deviate from Buffett's investment logic. For Buffett, having such a large position to speculate on future uncertainties and Apple re-entering a capital expenditure cycle is not quite in line with his style.

As Duan Yongping said, if Apple's stock price remains strong, Buffett should sell as much as he feels comfortable with, after all, this is not his area of expertise. Currently, due to a higher PE ratio caused by AI, which he is less familiar with, Apple's PE ratio has risen from an average of 25-30 times in the past 3 years to 35 times. In addition to other potential assets he may be interested in, when the logic changes and the current valuation is appropriate, Buffett may reduce his holdings for these reasons.

As for potential stock assets, Buffett has not made any new moves yet. He has been reducing his long-term holdings in Apple and Bank of America, while BRK's holdings of U.S. Treasury bonds have increased from $97 billion a year ago to $234 billion. BRK's holdings of U.S. Treasury bonds are even higher than the $195 billion held by the Federal Reserve With a cash balance of $276.9 billion on the books, it is indeed easy to fuel market speculation.

II. When will tech giants' capex turn profitable?

Regarding the concerns of investors like Old Ba and many others, how long will AI giants' capex last, and when will they become profitable? Recently, foreign institutions have provided some comparisons and analyses, offering a good perspective.

First, let's look at the changes in capex among major tech companies. In fact, Apple's investment in technology is not that high. In 2023, Apple's capital expenditure is $10.7 billion, and this year, foreign estimates are around $11-13 billion, with no significant changes expected. Even Cook did not reveal much about AI spending guidance at the performance meeting.

It can be seen that Apple is relatively conservative in its AI investment, as around $10 billion is not a significant amount for Apple. After all, the capex of other major companies has increased by 50% this year, and some have even doubled. Apple mainly controls its current capital expenditure through cooperation with other manufacturers and self-developed chips, such as Apple Intelligence, which embeds cooperation with OpenAI.

According to some foreign predictions, Microsoft's capital expenditure next year will reach $70-75 billion, Meta may rise to $50-55 billion, and TSMC may rise to $37-40 billion. Although Google, Apple, Tesla, and Amazon have not been predicted, the general trend is that the capex of major companies will continue to increase next year.

In the second quarter of this year, Microsoft's capital expenditure reached $13.9 billion, Google rose to $13.2 billion, Meta rose to $8.2 billion, and Amazon rose to $16.4 billion, totaling $51.6 billion for the four companies, a 59% increase year-on-year.

This has led many investors to wonder, with so much money being poured into AI at this stage, apart from Microsoft's Copilot and ChatGPT, there have been no new applications recently. Is it worth burning so much money now?

According to discussions between Goldman Sachs and NVIDIA, NVIDIA has stated that it prioritizes customer return on investment, and the capex of major customers is sustainable. It is expected that NVIDIA may disclose the level of ROI provided by customers in the next quarterly report.

Goldman Sachs stated that Microsoft's capital expenditure efficiency is equivalent to 4-5 years of the cloud computing cycle. Microsoft's AzureAI has generated higher revenue in nearly 5 quarters than Azure did in the first six years after its launch In other words, Microsoft's return on investment and cost-effectiveness in AI are higher than cloud services.

The report mentions that, according to data shared by Meta and NVIDIA, providers of LIama3's API can generate $7 in revenue in the future for every $1 spent on servers over 4 years. Therefore, from the perspective of major companies, investing in AI can be profitable, especially in cloud service AI.

Goldman Sachs predicts that in 2024-2025, Google, Microsoft, Amazon, and Meta's investments in AI cloud services will continue to grow.

Furthermore, according to Morgan Stanley's forecast, the potential revenue from AI capital expenditures in the 2024 fiscal year ranges from $5.8 billion to $9.6 billion. It is estimated that by the 2027 fiscal year, the potential revenue from AI business will reach a range of $45.6 billion to $77.4 billion, with a gross profit margin of approximately 50-70%.

The significant difference in the middle is due to the speed of AI investment deployment and operational efficiency. As for when the first tech stock will retract its AI investment, Barclays predicts that we may see the first tech stock reducing AI investments in 2026. However, it also emphasizes that it took 5 years for the first groundbreaking app to appear after the launch of the iPhone, and currently AI has only been in its early stages for 20 months. Undoubtedly, AI is in its early stages, and long-term investment is essential.

III. Conclusion

Currently, tech stocks are consistent in their capex growth, with foreign capital referring to it as the "Fear of Missing Out," abbreviated as "FOMO." This attitude is a fear of missing out, even if it means burning cash in the short term, as long-term cash flow will not be affected. This is more like an insurance that tech companies have to buy in the process of developing new technologies.

Therefore, when all companies are increasing capex, although Apple's investment amount is currently the smallest among them, will it passively increase in the future? This is uncertain, and Buffett also does not invest in tech stocks that are in the earliest stages of development, which may be one of the important factors in reducing holdings