From Verdad Advisers, September 8:
Measuring the impact of higher capex on business fundamentals.
We are currently in the middle of a massive AI-driven capex cycle that is driving spending in the technology and utilities sectors to new heights.
The key question for investors in these sectors is what the return on this massive investment will be. Some critics are skeptical of tech leaders’ belief that we are in a race to achieve AGI (artificial general intelligence) and that AGI’s value will essentially be infinite. Enthusiasts point out that these leaders have been right on SAAS, mobile, and other big bets.
To try to contextualize this capex cycle, we can look at historical capex cycles across sectors and see what the fruit of that spend has been. There have been many new, exciting, and industry-transforming technological developments over the last 30 years, like the internet, mobile phones, and shale drilling, all of which have driven massive capex cycles.
For this analysis, we aggregated LTM assets, revenues, EBITDA, net income, and capital expenditures across all US-listed companies over the last 30 years, quarterly, by sector. When we scale capex as a percentage of revenue, we can see the historical capex trends clearly for sectors like communications services and energy below.
Figure 1: Capex/Revenue
Sources: S&P Capital IQ and Verdad analysis
So what do companies get in return for their capital investments? To answer this question, we regressed forward 12M asset, revenue, EBITDA, and net income growth against the percentile-rank of trailing LTM capex as a percentage of revenue. The percentile rank allows us to control for sector-level differences in capital intensity.
The biggest finding from our regressions, with a high degree of confidence, is that higher capital expenditures as a percentage of revenue generate higher asset growth....
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