Everbright Securities: Domestic and overseas AIDC capital expenditures will continue to expand, focusing on investment opportunities in cloud vendors

According to the Zhitong Finance APP, Everbright Securities released a research report stating that 2025 is an important window period for the commercialization of overseas AI applications. The demand for AI data center infrastructure is expected to continue, and the profit pressure from the high capital expenditures of tech giants is still manageable. In the domestic market, the AI application cycle initiated by DeepSeek will drive the demand for both AI and non-AI cloud services, combined with the recovery of traditional cloud demand and the revaluation of domestic cloud assets, which is expected to bring about a performance and valuation resonance market.

Overseas targets: Focus on Meta (META.US), Amazon (AMZN.US), Microsoft (MSFT.US), Google (GOOGL.US), Oracle (ORCL.US).

Domestic targets: Recommend Alibaba-W (09988), Tencent Holdings (00700), Kingsoft Cloud (03896), Kingsoft Software (03888), Lenovo Group (00992); pay attention to China Telecom (00728), China Unicom (00762), GDS Holdings (09698), Century Internet (VNET.US), New Oriental Education & Technology Group (01686).

The main viewpoints of Everbright Securities are as follows:

Since 2023, the investment logic of US tech giants and the AI narrative have undergone multiple changes. The stock prices of Meta and Amazon, which have performed well in 2023, are not solely driven by the AI narrative; the main investment line is the recovery of cyclical businesses. For Microsoft and Google, the focus is on whether optimistic expectations for AI can be realized in cloud business, while Amazon can tolerate a slowdown in AWS revenue growth under the Davis double-hit market. In 2024, high capital expenditures are gradually becoming a drag on the performance of large cloud companies, and whether cloud business revenue can accelerate growth has become the most important investment line for tech giants.

Reviewing the stock prices of US cloud companies from 2023 to now, the AIDC narrative can be roughly divided into three stages:

1) Stage One: Significant growth in capital expenditures, with management expressing positive views on the return on investment for AIDC, driving stock prices up; 2) Stage Two: The market begins to seek the commercialization of AIDC, and any slowdown in cloud business growth or guidance falling short of expectations will put pressure on stock prices; 3) Stage Three: The market begins to worry that the return on investment for AIDC is below expectations, as well as the depreciation cost pressure brought by high capital expenditures.

The AI investment cycles of US tech giants vary, and capital expenditures will continue to expand in 2025. In Q4 2024, the capital expenditures of Microsoft, Google, Amazon, and Meta are expected to be $22.6 billion, $14.3 billion, $26.3 billion, and $14.8 billion, respectively, with year-on-year growth of 96.5%, 29.8%, 87.9%, and 87.9%, respectively. Cash capital expenditures generally exceeded expectations. In 2024, the proportion of capital expenditures to operating cash flow for tech giants will exceed 40%.

The capital expenditure guidance of US tech giants is positive. 1) Meta: Expected capital expenditures in 2025 are $60-65 billion, a year-on-year increase of 54.6%-67.5%; 2) Oracle: Expected capital expenditures in the fiscal year 2025 will double; 3) Microsoft: Capital expenditures in 2025 will continue to expand, with initial signs of pressure on cloud business gross margins; 4) Google: Capital expenditures in 2025 will reach $75 billion, a year-on-year increase of 43%, higher than the consensus expectation of 27%; 5) Amazon: Expected capital expenditure in 2025 to reach $105.2 billion, a year-on-year increase of 34.5%.

Reviewing the historical investment cycles of tech giants, how much pressure does it bring to company profitability?

The long-term profitability pressure ranking is Microsoft > Amazon > Meta > Google. Microsoft's cloud business profit release is basically over, while Amazon's e-commerce logistics fulfillment cost ratio still has room for reduction; Meta's capital expenditure simultaneously serves the generative AI strategy and the structural enhancement of its main advertising business revenue, opening up growth space on the revenue side; Google has ample cash flow, and its cloud operating profit margin still has room for improvement compared to Microsoft's Intelligent Cloud and AWS.

Domestic internet giants are starting a new round of capital investment cycle, how will the AIDC narrative unfold?

In 2025, domestic internet giants will successively enter a new round of AI investment cycle. In Q4 2024, Alibaba's capital expenditure was 31.78 billion yuan, a quarter-on-quarter increase of 81.7%. Over the next three years, capital expenditure is expected to exceed the total of the past ten years, which is expected to bring some pressure on profitability, but the infrastructure will be quickly digested by internal and external customer demand.

The recovery of traditional cloud demand combined with the incremental growth brought by AI business is expected to drive domestic cloud vendors' revenue to exceed expectations and accelerate growth in 2025, continuously boosting domestic AIDC investment sentiment. With the increase in AI-related investments by internet companies, the signals for boosting the cloud computing market are evident, and several cloud vendors' revenue growth rates rebounded sharply in H2 2024. This round of domestic AIDC market can be compared to the 2023 US stock cloud vendor market.

Risk Analysis:

AI technology research and development and product iteration encounter bottlenecks; risks of intensified competition in the AI industry; risks of commercialization progress falling short of expectations; domestic and foreign policy risks