According to the financial app Zhitong, Minsheng Securities released a research report stating that the capital expenditure of North American cloud businesses in CY3Q24 was stable with an upward trend, the current demand for computing power is still strong, the capital expenditure for 2025 is gradually becoming clearer, and the narrative of computing power remains the focus. The capital expenditure of the top four cloud businesses in CY3Q24 basically met expectations, and will continue to grow in 2025; the demand for computing power remains strong, and cloud businesses may increase Capex potential space by reducing Opex and extending depreciation periods. The positive contribution of AI to cloud business performance has begun to gradually show, and there is still hope for maintaining high-speed growth in the future. With the commercialization of AI investment, cloud businesses are expected to be more proactive in capital expenditure.

Event:

According to market reports, as of November 5, nvidia reached a market cap of $3.43 trillion, becoming the world's largest company by market cap.

In the previous week, the top four cloud businesses in North America announced their third-quarter performance and capital expenditure. The total capital expenditure of the top four cloud businesses in North America in CY3Q24 was $59.814 billion, an increase of 61.7% year-on-year and 13.2% quarter-on-quarter. From the perspective of the capital expenditure of the top four cloud businesses, Amazon's capital expenditure exceeded expectations, while the capital expenditure of the other three cloud businesses basically met previous guidance and market media expectations. The bank believes that the core contradiction in the current overseas computing power industry chain is still the demand growth by 2026. The higher-than-expected capital expenditure of cloud businesses is a major reason for the growth of nvidia's market cap, and it is necessary to continue monitoring cloud spending plans in the future.

The main points of the Minsheng Securities report are as follows:

The capital expenditure of the top four cloud businesses in CY3Q24 basically met expectations and will continue to grow in 2025.

In CY3Q24, the total capital expenditure of the top four cloud providers in North America was $59.814 billion, a year-on-year increase of 61.7% and a quarter-on-quarter increase of 13.2%; Market media unanimously expect the total capital expenditure of the top four cloud providers in North America in CY2024 to be $222.6 billion, a year-on-year increase of 51.0%.

Microsoft: CY3Q24 capital expenditure was 14.923 billion US dollars, qoq +7.6%, yoy +50.5%. Previously, the company guided that Q3 capital expenditure would increase on a quarterly basis, and the actual data basically met expectations. The company guided that capital expenditure in the next quarter will increase on a quarterly basis, but with the growth in demand, the rate of capital expenditure growth will slow down.

Meta: CY3Q24 capital expenditure was 9.21 billion US dollars, qoq +12.7%, yoy +40.8%. The company raised the full-year capital expenditure expectation range from 37-40 billion US dollars in the previous quarter to 38-40 billion US dollars, in line with the market's media consensus of 39.1 billion US dollars. For 2025, the company expects a significant increase in capital expenditure.

Google: CY3Q24 capital expenditure was 13.061 billion US dollars, qoq -0.9%, yoy +62.10%. Previously, the company indicated that Q3 capital expenditure would be maintained at or above 12 billion US dollars. The actual data slightly exceeded expectations. According to the company's guidance, it is estimated that the company's capital expenditure in 2024 will be over 50 billion US dollars, with moderate growth in 2025, consistent with the previous guidance.

Amazon: CY3Q24 capital expenditure was 22.62 billion US dollars, qoq +28.4%, yoy +81.3%, significantly exceeding market media expectations. The company's planned capital expenditure for 2024 is 75 billion US dollars, and it is expected to increase further in 2025.

The demand for computing power remains strong, and cloud merchants may increase Capex potential space by reducing Opex and extending depreciation periods.

Current computing power demand remains very strong: on one hand, Amazon's capital expenditure in the third quarter far exceeded expectations, on the other hand, Microsoft mentioned in the earnings conference that it will not use graphic cards for external leasing. Market concerns mainly arise from the further growth space of capital expenditure for cloud merchants. The bank believes that there is still room for improvement in current capital expenditure for cloud merchants.

1) AI has already brought cost reduction and efficiency improvement to Opex. Google stated at the earnings conference that it will use AI to enhance employee work efficiency to offset the significant increase in Capex.

Cloud vendors have extended the depreciation period of cloud infrastructure. Microsoft mentioned in the earnings conference that the depreciation time of AI fixed assets will reach 15 years, far higher than the previous depreciation time. Overall, although the four major cloud vendors have not updated specific numerical guidance for 2025 capital expenditures, the qualitative expressions are basically consistent with the previous quarter. However, cloud vendors have already taken various measures to increase Capex space to cope with the strong demand for computing power.

The gradual contribution of AI to cloud vendor's revenue is becoming evident, with the potential resolution of the ROI issue.

Previously, another core concern of the computing power industry chain in the market was how cloud vendors can generate returns from annual capital expenditures of hundreds of billions of dollars. In this quarter's earnings conference, multiple cloud manufacturers expressed optimistic expectations for AI revenue contributions:

Microsoft stated that the AI business will contribute an annualized revenue volume of $10 billion in Q4.

Meta stated that AI-driven recommendation algorithms have increased the usage time of its applications by 8%.

Amazon mentioned that AI's annual revenue reaches billions of dollars and will maintain a three-digit annual growth rate. The current positive contribution of AI to cloud vendors' performance has begun to gradually manifest, and it is still expected to maintain high-speed growth in the future. With the business model validation of AI investments, cloud vendors' investment in capital expenditures is also expected to become more proactive.

Investment advice:

Global leaders in computing power: Nvidia (NVDA.US), AMD (AMD.US).

2) Domestic computing power alternatives: National Light Information (688041.SH), Cambricon Technology Group-U (688256.SH), Changsha Jingjia Microelectronics (300474.SZ);

3) PCB: Victory Giant Technology (300476.SZ), Wus Printed Circuit (002463.SZ) etc.;

4) Copper interconnect: Shenzhen Woer Heat-Shrinkable Material (002130.SZ), Fit Hon Teng Precision Technology (06088), Tongling Jingda Special Magnet Wire (600577.SH), Shenyu Communication Technology Inc. (300563.SZ) etc.

Risk warning: Risks of downstream demand falling short of expectations; risks of insufficient upgrade of large model capabilities; risks of AI applications not landing as expected.