Pershing Square: Big Tech AI capex is a growth bet, not a defensive burden

The letter provides a prominent counterpoint to the capex worries that have squeezed hyperscaler valuations this year, although Pershing Square owns Microsoft, Meta and Amazon. The firm’s two-sided argument is what investors can act on: revenue either exceeds consensus, or capital spending is reduced, and free cash flow would be higher than analysts currently forecast in both cases. On that reading, the case is broadly favorable for the hyperscalers. For chipmakers and hardware suppliers, which have outperformed their customers sharply this year, the possibility of capex cuts is the risk to monitor. By drawing a clear line between hyperscalers with abundant cash and neoclouds that depend on debt, the letter also adds to pressure on neocloud stocks and credit.

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According to Bill Ackman’s Pershing Square, the market has reversed the AI capex narrative: it treats growth spending as a lasting expense, even though the outlay should produce either quicker revenue growth or, if not, lower spending.

Summary:

• Pershing Square describes hyperscaler capex as an offensive investment in growth rather than a defensive expense to protect current operations.
• Capital spending by Microsoft, Meta, Amazon and Google has increased almost five-fold, from roughly $140 billion in 2023 to about $740 billion in 2026; consensus expects a 35% rise to over $1 trillion next year.
• Pershing Square expects hyperscaler revenue to surpass consensus over the next several years; if that does not happen, it anticipates capex reductions, and it says free cash flow would exceed forecasts under either outcome.
• It puts the cost of building one gigawatt of AI capacity at $40 billion to $50 billion, with a possible 15% to 25% pre-tax return on capital.
• Pershing Square argues the hyperscalers can finance most of the buildout themselves, unlike neoclouds, which are seeing wider credit spreads and declining share prices.
• Pershing Square’s own third-quarter fee-related earnings climbed 13% to roughly $64 million, while distributable earnings dropped 12% as corporate taxes began to apply.

Bill Ackman’s Pershing Square has made the case that Big Tech’s capital spending surge is an offensive wager on growth, not a defensive expense, and that investors are underrating the revenue it will produce.

A third-quarter shareholder letter signed by Ackman and Chief Investment Officer Ryan Israel said capital spending at Microsoft, Meta, Amazon and Google, the four hyperscalers, has increased almost five-fold. Based on company guidance, it rose from about $140 billion in 2023 to roughly $740 billion in 2026, and consensus projects another 35% gain to more than $1 trillion next year. Over that period, capital intensity for the group has increased from approximately 12% of revenue to an estimated 38%.

The outlay has weighed on hyperscaler valuations. Even with earnings growth of 27%, their shares have risen an average of about 8% this year, while the S&P 500 semiconductor and technology hardware indexes, which Pershing uses as proxies for the companies supplying the buildout, are up 44% and 36%.

Pershing Square argued that consensus estimates assume today’s heavy spending will last for years and embed only modest revenue acceleration. In its view, it is highly probable that hyperscaler revenue growth will exceed analyst forecasts. Should that fail to happen, the firm expects the companies to reduce capex from current levels, which would leave free cash flow meaningfully above consensus in either scenario.

Pershing Square estimates that building one gigawatt of AI data center capacity costs roughly $40 billion to $50 billion and could bring in $15 billion to $20 billion of annual revenue. That would imply a pre-tax return on invested capital of about 15% to 25%. With that assumption, the firm sees a path for revenues to exceed consensus by 15% to 35% within three years.

Pershing Square also dismissed worries that the buildout will strain the hyperscalers’ finances, separating them from neoclouds, Oracle and SpaceX. It noted that the four have virtually no net debt and can cover most of their spending with operating cash flow.

The firm’s portfolio includes Microsoft, Meta and Amazon. In separate results, Pershing Square Inc. said third-quarter fee-related earnings were about $64 million, an increase of 13%. Distributable earnings declined 12% to roughly $49 million as corporate income taxes applied for the first time. Ackman and Israel will hold a conference call at 9:30 a.m. ET (1430 GMT) on Tuesday, with a public Q&A following at 10:30 a.m. ET (1530 GMT).