Key Points
The semiconductor sector, as summarized by the iShares Semiconductor ETF (NASDAQ: SOXX), had a rough go of it in July. The exchange-traded fund plunged a stunning 23% from its highs in just one month, with many of the ETF’s components down by much more.
No doubt, these stocks had run up a stunning 112.8% in the first half of the year — an unusually positive move for sure. Still, given the scale of the AI build-out many anticipate over the next decade, the moves higher are not unwarranted, should some current long-term AI demand estimates prove accurate.
Fortunately, recent results and commentary from the big cloud hyperscalers all said the same thing: The AI build-out continues, with no signs of slowing.
Q2 cloud results were stunning
The main customers for many semiconductor stocks are the large cloud computing vendors: Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Oracle (NYSE: ORCL). On top of these big spenders are the neoclouds such as CoreWeave (NASDAQ: CRWV) and Nebius (NASDAQ: NBIS), along with enterprises spending on their own on-premise data centers. However, the biggest spenders are these top five cloud infrastructure companies.
Fortunately, the recent earnings reports from these five giants all indicate the same thing: exploding cloud growth, higher capital expenditure targets for this year, and forecasts that 2027 will be an even bigger year.
Amazon and Alphabet each raised their 2026 capital spending targets to $220 billion and $200 billion, up by $20 billion and $15 billion, respectively, relative to prior guidance. Microsoft actually lowered its capital expenditure guidance from $190 billion to $175 billion, but that was entirely due to an accounting change that put data center leases into operating lease expenses. On balance, Microsoft maintained its spending. Meta Platforms raised the lower end of its previously stated range to $130 billion from $125 billion, with the high end remaining at $145 billion. And Oracle forecast up to $95 billion in gross capital expenditures for its fiscal year ending next March, a massive jump from the $55.7 billion spent in the past year.
That’s about $830 billion in spending this year, all going toward servers packed with GPUs, CPUs, ASICs, and networking equipment: a boon for the chip sector.
Investors have been wondering whether all this spending will pay off, but just about every one of these CEOs has noted that they are spending in response to solid demand signals. In fact, all of these big tech CEOs confidently reiterated that demand for compute is vastly outpacing supply.
One can see this effect in the accelerating growth across all major hyperscalers. Amazon’s cloud growth accelerated to 37%, up from 28% in the prior quarter. Microsoft’s Azure growth accelerated to 43% from 39%. Alphabet’s cloud growth jumped to 82% from 63%. Meanwhile, Oracle’s cloud growth accelerated 93%, compared with 84% growth in the prior quarter. Meta doesn’t have a cloud business, and its advertising revenue slightly decelerated quarter over quarter; however, its 28% growth was still strong and well above the year-ago quarter. That’s still very impressive given the massive size of its digital advertising franchise.
Meanwhile, at Amazon, Microsoft, and Alphabet, margins are stable or expanding, with early indications that these companies are generating high returns on this new capital spending.
It all adds up to more semi spending
While the chip sector has sold off amid fears that AI spending might not last, all indications from this earnings season point to a shortage of AI compute and continued strong demand for the foreseeable future. Even Meta, which reported the “least good” results out of the five, also stated there was a shortage of computing power across the industry.
As long as these big cloud companies continue to realize strong growth and profitability from their recent AI spending, look for that spending to continue. That means a lot more sales of semiconductors, servers, and networking equipment, benefiting the SOXX and its holdings. Long-term-oriented investors should therefore look to buy their favorite chip stocks or ETFs on this dip.
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Billy Duberstein and/or his clients have positions in Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Microsoft, Oracle, and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.
