Buy Stock in the Mag 7 Hyperscalers or Are They Spending Too Much?

Core Insights - The Mag 7 hyperscalers, including Amazon, Alphabet, Meta, and Microsoft, are under scrutiny for their significant investments in AI infrastructure despite their strong profitability and balance sheets [1][2]. Capital Expenditures - All Mag 7 hyperscalers are projected to exceed $100 billion in annual capital expenditures for AI-related infrastructure by 2026, with Microsoft leading at an expected $80 billion in spending this year [4]. - Microsoft’s trailing twelve-month CapEx has risen to over $69 billion, raising concerns about capital efficiency [4]. Return on Invested Capital (ROIC) - Microsoft’s ROIC has stabilized at 23%, although it has declined in recent years, remaining above the 20% threshold considered favorable [5]. - In contrast, Meta, Alphabet, and Amazon have seen increases in ROIC, with Amazon approaching 20%, Meta at 29%, and Alphabet at 31%, suggesting that market concerns about their CapEx may be overstated [8]. Earnings Performance - Amazon has shown a notable increase in profitability, with FY25 and FY26 EPS estimates rising by over 4% and 2% respectively over the last 60 days [9]. - Alphabet has experienced a significant uptrend in EPS revisions, with its stock price increasing over 20% in the last three months [11]. - Microsoft’s CapEx concerns have overshadowed slight increases in its FY25 and FY26 EPS estimates, while Meta has seen an 18% drop in FY25 EPS estimates over the last 60 days [12]. Investment Outlook - Amazon is currently rated Zacks Rank 2 (Buy), while other Mag 7 hyperscalers hold a Zacks Rank 3 (Hold), indicating a favorable outlook for Amazon based on positive EPS revisions and increasing ROIC [14][15]. - Amazon is expected to benefit significantly from AI investments, enhancing both its AWS cloud services and core e-commerce operations [15].