Samsung and SK hynix Shares Slide: "It's Because of You, the Cash King"—The Graph Explains It [Tech Talk]

Shrinking Free Cash Flow Puts Pressure on Big Tech Shares

AI Boom Currently Benefits Only Semiconductor Companies

Crisis Will Spread if Big Tech, the Main Source of Capital, Falters

Editor's NoteThis feature explains, in accessible language, the essential yet often unfamiliar technologies now integral to our lives, from AI and semiconductors to telecommunications and biotechnology.

Samsung Electronics and SK hynix, which continue to break record profits, have recently experienced extreme volatility in their stock prices. What has amplified investor concerns? A research report graph by Bank of America (BofA) released prior to this recent adjustment in semiconductor stocks contains a key indicator for gauging the future outlook of the semiconductor industry.

Diverging Performances of Big Tech and Semiconductor Companies

Forecasted free cash flow (FCF) for the next 12 months of big tech hyperscalers (blue) and semiconductor companies (navy). Bank of America Global Research

After Micron, the U.S.-based memory manufacturer, reported an earnings surprise by surpassing quarterly revenue of 40 billion dollars for the first time in its history, the BofA Global Research team released a report earlier this month. The report presented the forecasted free cash flow (FCF) for big tech hyperscalers—operators of mega-scale data centers for artificial intelligence (AI)—and semiconductor companies, considered the two main players in the current AI industry.

Hyperscalers refer to companies such as Amazon, Microsoft, and Google, which operate data centers around the world containing hundreds of thousands of advanced computer chips. The listed semiconductor companies include Nvidia, Broadcom, Samsung Electronics, and SK hynix. According to the research team's compilation, the total FCF of semiconductor companies is expected to exceed 430 billion dollars over the next 12 months. By contrast, for the first time ever, hyperscalers are projected to see their FCF turn negative.

"Changing of the Guard" in Tech Industry Profit Leaders

US Mega Data Center for Artificial Intelligence (AI). Photo by Reuters Yonhap News

FCF is the amount left over after capital expenditures (CAPEX) are deducted from a company’s operating cash flow. In other words, it is surplus cash outside the core business activities. Hyperscalers have used their FCF to buy back their own shares and support their stock prices.

During past tech booms, the most profitable companies were hyperscalers, and their FCFs were correspondingly high. This is why big tech stocks climbed rapidly. However, driven by AI competition, these big tech companies are now investing most of their operating profits into their data centers. On the other hand, semiconductor companies have benefited from various chip shortages. As a result, semiconductor companies' FCF is rising. The research team described this as a "changing of the guard" for FCF in the tech sector.

Amid concerns over shrinking FCF, big tech stocks have struggled recently. While memory companies’ stock prices nearly doubled in the first half of this year, hyperscaler stocks managed only low double-digit gains—or even shifted into negative growth.

If Big Tech, Holding the Purse Strings, Falters, Semiconductors Feel the Pressure Too

Satya Nadella, Chief Executive Officer (CEO) of Microsoft. Recently in the United States, it was revealed that Microsoft was accused of deceiving investors, particularly concerning some retirement pension plans, leading to a securities fraud class-action lawsuit filed in the Seattle federal court. Microsoft

The challenge is that falling profits for hyperscalers could eventually have a negative impact on semiconductor companies as well. There are worries that key shareholders in big tech, fearing declines in stock prices, may restrict the companies’ capital expenditure decisions. Hyperscalers themselves could also slow their competitive pace. If these companies reduce capital expenditures even slightly, the effect will immediately hit semiconductor firms.

In fact, some U.S. shareholders filed a class action lawsuit against Microsoft this year for securities fraud. There was criticism that the AI products developed by Microsoft underperformed compared to expectations, and that profits from Azure, its core cloud business, could be eroded by AI investments and a decrease in users.

Pressure is also mounting on memory companies at the heart of rising semiconductor prices. Apple CEO Tim Cook has lobbied the U.S. government to allow imports of Chinese memory products, and the three major memory companies have faced a class-action lawsuit in the U.S. for alleged DRAM price-fixing. The term “chipflation” has even emerged, as rising semiconductor prices drive up overall electronics costs.

Everything Hinges on the Success of U.S. Tech Giants’ AI Investments

Samsung Electronics DRAM. Samsung Electronics

Ultimately, for the current AI boom to continue, hyperscalers need to return to profitability. Massive investments in data centers must generate returns, and FCF needs to build up again. Conversely, if hyperscalers’ financial conditions continue to deteriorate, semiconductor companies will eventually slump as well.

Torsten Slok, chief economist at Wall Street asset manager Apollo Global Management, said on July 10, "If capital expenditures by hyperscalers proceed as scheduled, but FCF recovery is delayed, the entire stock market will be at risk," analyzing that "big tech will increasingly raise capital by taking on more debt."

He added, "Currently, the seven major U.S. tech stocks (M7) account for an outsized share of the market index. Ultimately, the ripple effects of a crisis could spread from semiconductors to electricity, data centers, and finally the entire stock market," explaining, "At present, the stock market is dependent on when a very small number of companies can realize returns on their AI investments."

This content was produced with the assistance of AI translation services.