Any change in investor expectations regarding the Fed's path to rate cuts or the fluid situation in the Middle East could lead to further volatility. However, we are encouraged by the many positives in technology fundamentals during the first quarter reporting season, ahead of upcoming catalysts such as NVIDIA results and major industry conferences. . We believe this continues to support the investment case for generative artificial intelligence (AI).
Significant upward revisions to capital spending support the AI computing sector. Microsoft, Alphabet, Meta, and Amazon all reported increases in capital spending, with most of their incremental spending going to AI-related infrastructure. Total capital spending by these four companies is likely to reach US$205 billion this year, a US$20 billion increase over our previous forecast and a 40% increase from 2023 spending. Given that we believe most of the upward revision in capital spending should be spent, for AI computing, from this year to 2025, the AI computing industry will generate a combined revenue of USD 30-40 billion. I think there will be an upside. This means that the sector's revenue could increase by more than 50% to USD 164 billion next year, and the semiconductor industry.
Accelerating cloud growth signals increased monetization through AI. Microsoft, Alphabet, and Amazon's cloud platforms all reported accelerated revenue growth in the first quarter, with combined growth now approaching 24% year-over-year. This compares to less than 20% prior to the September 2023 quarter, clearly indicating that AI-related monetization is a tailwind for software revenue growth.
The improvement in cash flow generation of large tech companies shows their defensive characteristics. In addition to the surprise announcement of its stock repurchase program, Apple also reported a slight increase in its quarterly dividend. This increase in cash distributions supports our positive view of the large technology company overall, which is driven by strong free cash flow generation. Currently, the total free cash flow of major tech companies is expected to increase by 22% from $460 billion in 2024 to $560 billion in 2025. We think this will make big tech companies relatively defensive in global technology.
As such, we continue to believe that the risks and rewards of global technology are attractive at current valuations, with earnings expected to grow 20% this year and 16% in 2025. While we prioritize semiconductors, software and big tech to ride the AI wave, we believe there is also an opportunity for over-exposed Asians to benefit. Investors can also use structured strategies to position for further upside while avoiding drawdowns.
Main contributors – Solita Marcelli, Mark Haefele, Sundeep Gantori, Daisy Tseng, Jon Gordon
Original report – Strong tech results support AI investment case, May 3, 2024.
