Data Center Return on Capital

Wall Street is skeptical about the many billions of dollars currently being spent to build out more AI-centric data centers. Most accept that the money will be spent—but there’s a suspicion that this money will be wasted and not earn an adequate return.

While these sums are enormous, we think it’s easy to see all this data center spending earning a reasonable return on capital, and rather quickly. That’s because most of the money is being spent by a few large platform companies who have two ways of monetizing all this data center investment.

Amazon, Microsoft and Google are prime examples. All three have large businesses operating at hyper-scale with ample opportunities to immediately turn this new capital spending into accelerating revenue growth. For example, Amazon has its e-commerce store. Microsoft has Windows and Office, and Google has Search and YouTube. Each company can readily use new data center hardware for these core business segments. 

And all three companies run a secondary cloud computing business, renting out excess data center capacity to customers. Having two large business segments operating at scale creates a clear path to earn solid returns on data center capital. 

With each earnings call, these companies continue to provide Wall Street analysts with clear signals that they’re seeing both growth and profitability. But the question persists “will they earn a reasonable return on it all?”

Our view is that this skepticism won’t last. It should become obvious that this spending is economically rational. And that Wall Street will likely swing into becoming too optimistic about these returns in due time.

– Evan

Disclosure: Dock Street Asset Management, Inc. and/or our clients may own Amazon (AMZN), Google (GOOG), Facebook (META) and Microsoft (MSFT). This article is not intended to be used as investment advice.