US Internet：Getting Over the Fears around Depreciation Expense Mismodeling

Investment Rating - The report maintains a Buy rating on Amazon (AMZN) with a price target of $220, a Buy rating on Meta (META) with a price target of $635, and a Neutral rating on Alphabet (GOOGL) with a price target of $204 [3][21]. Core Insights - The report highlights concerns regarding the modeling of depreciation expenses in relation to rising capital expenditures for major internet companies, suggesting that depreciation should increase at a faster rate than revenue due to significant capital investments [5][6]. - It is anticipated that quarterly earnings reports over the next 6-12 months will prompt analysts to adjust their depreciation expense forecasts, particularly for Meta, which is expected to provide clearer guidance in its upcoming earnings report [2][5]. - The potential underestimation of depreciation expenses could lead to significant impacts on earnings per share (EPS) estimates for 2025 and 2026, with Meta facing the largest potential delta [1][12]. Summary by Company Amazon (AMZN) - Capital expenditures for Amazon are projected to rise from $35 billion in 2024 to approximately $51 billion in 2025, leading to a 10% and 15% increase in depreciation expenses for 2025 and 2026 respectively [7]. - The potential delta in depreciation expenses could result in an overstatement of operating income by 4% and 6% for 2025 and 2026 [7][12]. Alphabet (GOOGL) - Alphabet's capital expenditures are expected to increase by 12.7% in 2025 and 31.7% in 2026, with corresponding increases in depreciation expenses of 10.8% and 13.8% [8][10]. - If depreciation forecasts were tied to revenue, the potential underestimation could lead to overstated EPS by 1% for both 2025 and 2026 [10]. Meta (META) - Meta's capital expenditures are projected to increase by 21.5% in 2025 and 1% in 2026, resulting in a significant increase in depreciation expenses of 11% and 22% [12]. - The potential underestimation of depreciation could lead to an overstatement of EPS by 7% and 14% for 2025 and 2026 respectively, with the company expected to provide clearer guidance in its 4Q24 earnings report [12][11].