European espresso: Pivotal shift in AI infrastructure presents supply chain opportunities

We have been talking for quite some time now, in fact the best part of a couple of years now, about the huge capex investment cycle underway to build artificial intelligence infrastructure, and the ways that we can access that through European equities.

The simple point is that the hyperscalers, those big US tech companies, have unleashed an investment cycle that is actually bigger than all the US fiscal stimulus packages combined. So we are talking at the minute that nearly US$300 billion a year going into data centres, and that includes all of the facilities themselves, and of course the Nvidia chips.

Now, year to date (as at time of recording on 24 January 2025), in the last couple of weeks we have had a lot of incrementally supportive news flow.

So the first thing was a blog post, actually, like a lobby letter, from Brad Smith, who is the Deputy Chair, of Microsoft, and he was really just reminding the Trump administration how important Microsoft is in enabling American supremacy in AI. And in that blog post he said: ‘we’ll spend about US$80 billion a year’. Consensus is in the lower 60s (ie. c. US$60 billion). The market got quite excited about that.

Then we had Taiwan Semiconductor give capex guidance above expectations. Taiwan Semiconductor actually produces the chips on behalf of Nvidia, so when they are spending more money, it means they are buying more machinery from the likes of ASML, here in Europe, in order to produce those chips.

And then in recent days, once Trump came into office, he announced something called ‘Stargate’, a consortium including Oracle, including OpenAI, which makes ChatGPT and SoftBank. And there is a commitment there to US$100 billion on data centres and artificial intelligence infrastructure, possibly growing to half a trillion dollars over the next four to five years.

So the news flow year to date has really just reminded us of the importance and the scale of this investment cycle that will be very durable. Now one of the arguments we made back in August when all of these stocks sold off quite heavily was that it is too soon to worry about return on investment for these hyperscalers.

Part of the narrative, part of the capex anxiety that came about over the summer of 2024, was ‘these guys are spending so much money; what if they stop, what if it is not sustainable because they are not seeing the rewards or the returns on that investment.

And we said “actually, the market is worrying about the wrong thing here”. We don’t think the market has to worry about the sustainability of the investment cycle. It actually needs to comfortable with the fact that these hyperscalers have accepted, committed to a change in their financial profile. So they are no longer going to look like those Silicon Valley asset-light ‘software as a service’ type companies. They are increasingly starting to look very asset-heavy, and if anything a bit more like telco companies.

We can certainly see that in Microsoft’s financial profile, where capex to sales is now 20 per cent, whereas a decade ago it was more like 5-6 per cent. Its property plant and equipment carried on the balance sheet is more like US$150 billion today and growing. And ten years ago it was more like US$14-15 billion.

So these companies have accepted that they need to change the financial profile of their businesses in order to stay in the game. That is really what we think the market has to get comfortable with, rather than agonize or worry too much about the sustainability, the durability of this investment cycle. We think it is very durable indeed. And therefore we have quite significant exposure to the supply chain beneficiaries.

Glossary:

Capital expenditure (capex): Money invested to acquire or upgrade fixed assets such as buildings, machinery, equipment or vehicles in order to maintain or improve operations and foster future growth.

Capex to sales: The size of capital expenditure relative to sales.

Hyperscaler: Large cloud-based service providers, which can provide services such as computing and storage at enterprise scale.

Software as a service (SaaS): A form of subscription-based software licensing accessed over the internet rather than installed on individual computers.