[Click e-Industry] Can't Recoup AI Investments? "Big Tech Can Recoup Server Costs in 3 Years"

Data center vacancy rate just 1.4%
Cloud incremental operating margins reach 49%
AI server investments pay back in under 3 years; useful life exceeds 5 years
FCF recovery expected as early as 2028

Analysts say concerns that Big Tech companies will be slow to recoup their AI-related capital investments are exaggerated. While massive investments are reducing free cash flow (FCF, the cash a company has left after subtracting capital expenditures and other costs from the cash generated by its operations), the recovery in cash flow could come sooner as AI demand and cloud profitability improve rapidly.

On November 2, Kang Jaegu, a researcher at Hana Securities, said, "Market concerns that Big Tech will fail to recoup its AI investments are excessive. While the outlook for FCF has worsened due to massive capital expenditures, revenue and operating profit in the cloud business are growing rapidly."

FCF Weakness Is a 'Growing Pain'... Outlook for Core Business Results Improves

According to financial data provider FactSet, the combined FCF forecast for Alphabet, Amazon, and Meta in 2027 has shifted from a surplus of $196.4 billion at the start of the year to a deficit of $120.2 billion recently. This is due to the capital expenditure (Capex) forecast nearly doubling over the same period, from $412.6 billion to $822.8 billion. In other words, spending on long-lived assets such as data centers and servers is expected to rise sharply.

By contrast, the combined 2027 revenue forecast for the three companies has increased by $234.1 billion from the start of the year. Forecasts for operating profit and operating cash flow have also been raised by $72.7 billion and $95.3 billion, respectively. This means FCF has weakened not because the core businesses have lost their ability to generate cash, but because capital expenditures to secure a leading position in AI infrastructure have surged.

Demand for AI infrastructure also remains strong. According to commercial real estate company CBRE, the operating capacity of data centers across eight major North American markets reached 10,903 MW in the first half of 2026, up 33.7% from a year earlier. Yet the vacancy rate fell by 0.2 percentage points to just 1.4%. Of the 7,481 MW of data center capacity under construction, 80.4% had already secured lease agreements.

Long-term contracts are also on the rise. As of the end of September, commercial backlogs stood at $677 billion for Microsoft, $664 billion for Oracle, and $567.7 billion for Alphabet. This indicates that massive data center investments are being made in response to actual customer orders.

The More Cloud Revenue Grows, the Faster Profits Increase

Improving profitability in the cloud business is also boosting expectations for a return on investment. In the third quarter of 2026, Amazon Web Services (AWS) and Google Cloud recorded incremental operating margins of 48.8% and 48.4%, respectively. The incremental operating margin measures how much of newly generated revenue translates into additional operating profit. For both companies, nearly half of their incremental revenue translated into higher operating profit.

The payback period for server investments is also shorter than the equipment's economic useful life. Amazon estimates that the average payback period for investments in servers and network equipment is less than three years. By contrast, the equipment has an economic useful life of at least five to six years, while data center buildings last more than 30 years. This means the existing equipment and facilities can generate additional cash even after the initial investment has been recouped.

Big Tech companies, which generate enormous amounts of cash from their own businesses, also face lower financing costs than GPU leasing companies that rely on external borrowing. "The ramp-up in operations at new facilities and increased customer usage are key drivers of operating cash flow," Kang added. "If the pace of capital expenditure growth moderates, the recovery in FCF, currently expected in 2028-2029, could come sooner."

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