Barclays Warns Big Tech Capex Surge Could Signal Earnings Downturn - What Investors Need to Know
As the capital expenditures (capex) of Big Tech companies continue to rise, Barclays strategists have issued a cautionary note regarding the potential impact on earnings growth. The investment bank points out that the industry is currently experiencing the highest capex-to-sales ratio in a decade, largely driven by investments in AI technology. While AI presents significant growth opportunities, it also brings a level of uncertainty.
Barclays highlights that the market is expecting high teens to low twenties percentage growth in earnings per share (EPS) for the next year. However, the increased cost base from the AI buildout could pose challenges for the more established segments of these companies as they transition past the high-growth phase from the second half of 2023 to the first half of 2024.
The strategists at Barclays note that similar spikes in capex in the past have preceded negative earnings cyclicality, as seen in 2018 and 2022. This could lead to higher uncertainty for Big Tech compared to the rest of the S&P 500 over the next two quarters.
Overall, the combination of increased capital intensiveness, potential earnings growth cyclicality, and a stricter regulatory environment presents downside risks to the valuations of Big Tech companies. Historically, during such phases, the next twelve months price-to-earnings (NTM P/E) ratios for these companies have dropped to the low-to-mid 20s.
While Barclays suggests that Big Tech could still perform well in the event of a soft landing for the economy, caution is advised at the higher end of the sector's trailing twelve-month valuation range. On the other hand, the cyclicality of the market could benefit other segments of the S&P 500 in the short term, particularly sectors like Consumer Services, which are expected to be well-positioned through the end of the year.
In conclusion, investors should be mindful of the potential impact of rising capex on Big Tech earnings growth and valuations. Keeping an eye on the evolving market dynamics and considering opportunities in other sectors could help navigate the current market environment effectively.