about 1 year ago • 2 mins
Given the plethora of things to worry about, company spending has been remarkably strong recently. Capital spending (capex) for S&P 500 firms was 24% higher last quarter, compared to the same time last year – back when share prices and executive confidence were riding high. But according to a Conference Board survey (dark blue line), in the past 40 years, chief execs have never been gloomier about what lies ahead for the US economy. And where management confidence goes, spending (light blue line) tends to follow.
For certain pockets of the economy – like heavy industrial equipment manufacturers that rely on capex for their revenues – this would seem to be dreary news. But elsewhere it might just turn out to be a welcome tonic.
Up until now, the profligate execs of America’s tech goliaths have been merrily spending on massive infrastructure projects, even in the face of slowing revenue growth. In the 2020-21 pandemic era, Big Tech capex – that’s adding up spending by Alphabet, Amazon, Apple, Meta, and Microsoft – was a staggering $236 billion. That’s roughly the same as the previous five years combined. Now, much of that splurge was about keeping up with demand caused by the world’s dramatic shift online, but with that demand now cooling off, investors are keen for those firms to get a tighter grip on their budgets.
So, as long as sales don’t drop off a cliff, any capex cutbacks would boost those firms’ free cash flow – that’s the cash left over after all day-to-day expenses and big project spending – and make their stock valuations look a whole lot prettier in the process. By my math, if execs revert back to pre-pandemic capex levels, their combined company values would be around 20 times their total potential free cash flow next year. Said another way, Big Tech would be collectively valued at around 5% free cash flow yield – that’s total free cash flow divided by their combined market values. That’d make it – were it one company – fairly similar to the overall S&P 500, which would be pretty attractive considering those firms should continue to outgrow the average.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.