Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Amazon's Capex Bet and What It Means for Stock Pickers
Transcript
- Lucas: Moody's just put out a warning that 'unprecedented' AI spending could threaten the credit quality of Amazon, Meta, and Alphabet. For a concentrated stock picker, this is the kind of headline that either crushes your thesis or sharpens it. Luna: Yeah, and it's a direct challenge to the 'just trust the AI story' narrative. The question is: how do you actually vet a company's capital spending plan when you're betting on a single stock? Lucas: Right. And I think the best case study right now is Amazon. They're expected to spend roughly 65 billion dollars on capital expenditures this year, way above their depreciation. That's a massive bet on AWS infrastructure and data centers. But their free cash flow over the trailing twelve months is only about 38 billion. Luna: That's a 27 billion dollar gap. So either they're building ahead of demand, or they're burning cash. Lucas: Exactly. And that's where the stock picker's work begins. You have to decide if that capex is productive – meaning it generates future returns above the cost of capital – or if it's speculative. And that kind of analysis is why we spend so much time on this show. Honestly, the fact that we can do this ad-free is thanks to a small group of listeners who chip in through buy me a coffee dot com slash fexingo. It's not a big thing, but it keeps us independent. Luna: Yeah, it's a simple way to support if our conversations have helped you think about a stock decision differently. We're grateful. Lucas: So back to Amazon. The key metric to watch is incremental return on invested capital. Over the past five years, Amazon's ROIC has been declining, from about 15% to around 10% now. If that trend continues, the stock is pricing in a recovery that may not come. Luna: But isn't some decline expected when you're investing heavily upfront? The payoff comes later. Lucas: That's fair, but the magnitude matters. Amazon's invested capital has grown about 40% in three years, while operating income has barely budged. That's a red flag if you're holding a concentrated position. Luna: How does Amazon compare to Microsoft? Microsoft's capex is also high but its free cash flow is much stronger. Lucas: Great point. Microsoft generated about 74 billion in free cash flow last year against capex of roughly 55 billion. So they're actually cash-flow positive after investment. That's a big difference. Their return on invested capital has stayed above 20%. Luna: So for a concentrated portfolio, Microsoft might be the safer AI bet than Amazon. Lucas: It depends on your time horizon and conviction. But the Moody's warning reinforces that you can't just assume all AI capex is good. You need to dig into the unit economics. Luna: What about Alphabet? They're also spending heavily, and their cloud business is smaller. Lucas: Alphabet's capex was around 45 billion last year, and free cash flow was about 70 billion. So they're more like Microsoft than Amazon. But their ROIC has been slipping too, and the market is pricing in a lot of AI upside. Luna: So the common thread is: check free cash flow conversion and return on capital. If those are deteriorating, the stock might be overvalued. Lucas: Exactly. And for Amazon specifically, I'd look at the growth in AWS versus the capex needed to support it. If AWS revenue is growing 15% but capex is up 30%, that math doesn't work long term. Luna: Do you think the market is already pricing that in? Amazon stock hasn't moved much on the Moody's news. Lucas: The stock is down about 2% in the last week, but that's more about the broader rotation into value. The market might be ignoring the credit risk because rates are still low-ish. But if the Fed hikes again, these companies with high leverage become vulnerable. Luna: Right, oil prices are ripping higher, and there's talk of a rate hike. That could change the calculus. Lucas: It absolutely could. Higher rates increase the cost of capital for capex-heavy companies. So Amazon's 65 billion in spending becomes more expensive to finance. Luna: So if you're building a concentrated portfolio, you might want to avoid stocks where the capex story is fragile. Lucas: Right. And the alternative is to invest in companies that generate excess cash flow and return it to shareholders. Look at Berkshire Hathaway sitting on 300 billion in cash. They're not forced to deploy capital on risky bets. Luna: But Berkshire has its own challenges, like struggling to find good acquisitions. Still, the balance sheet strength is undeniable. Lucas: Exactly. So for this episode, the takeaway is: when you see a big AI capex number, don't just assume it's value-creating. Run the ROIC analysis, compare free cash flow, and consider the macro environment. That's how you avoid getting caught in a credit downgrade. Luna: And if you want to support more research like this, you know where to find us: buy me a coffee dot com slash fexingo. Lucas: Next time we'll look at another company that's piling into AI and see if the numbers hold up. Thanks for listening.