Chipmakers' rally hinges on Big Tech earnings due later this month

Concerns about the heavy investment burden facing US Big Tech companies are fueling debate over whether the memory chip cycle has already peaked. As competition in AI infrastructure intensifies, these companies are growing more dependent on external borrowing to finance their spending. Analysts say the direction of chipmakers' share prices will largely be determined by second-quarter earnings reports from US tech giants, due later this month, and whether their commitment to expanding AI investment holds.

According to the financial investment industry, Alphabet, Amazon, Meta and Oracle together raised a total of $296 billion this year to fund AI infrastructure expansion — more than five times their combined estimated annual free cash flow of around $57 billion.

As the AI investment race intensifies, Big Tech companies are tapping every available channel to raise funds, including share offerings and large-scale corporate bond issuances. Amazon issued $25 billion in dollar-denominated corporate bonds on Tuesday. Oracle had earlier issued $25 billion in bonds in February, and Alphabet issued $20 billion. Alphabet also launched an $85 billion equity offering program to finance its AI infrastructure investment.

Markets are worried about how heavily AI investment has come to depend on debt and equity financing. Capital expenditure by the five US hyperscalers — Alphabet, Amazon, Meta, Oracle and Microsoft — is estimated to nearly quadruple from $243 billion in 2024 to $945 billion in 2028, with this year's figure alone expected to exceed $670 billion.

This surge in capital expenditure, combined with profitability concerns, is amplifying the debate over a memory chip peak. If the return on investment from AI infrastructure spending falls short of expectations, hyperscalers could slow the pace of future investment — a scenario that would be difficult to rule out. In that case, expectations for growing memory chip demand would weaken, potentially weighing on the earnings and share prices of chipmakers such as Samsung Electronics and SK hynix.

"The combined operating profit of Samsung Electronics and SK hynix has expanded to roughly 57 percent of hyperscalers' capital expenditure," said Hwang San-hae, a researcher at LS Securities. "If the profits of AI intermediate-goods suppliers grow excessively, the pressure on hyperscalers' return on investment will intensify, and the justification for further capital deployment could come into question."

The securities industry views the upcoming earnings releases from US Big Tech companies, beginning later this month, as a pivotal moment that will set the direction for chipmaker share prices. The actual scale of investment and whether hyperscalers maintain their trajectory of expanding capital expenditure are seen as the key variables shaping sentiment toward the semiconductor sector.

"The judgment needed right now is not 'should we sell semiconductors' but 'has AI capex actually turned down,'" said Lee Jae-won, a researcher at Yuanta Securities Korea. "It is essential that the second-quarter earnings reports from hyperscalers, due later this month, show AI capex guidance being maintained or raised."

Kwon Sun-ho, a researcher at Daishin Securities, said the key things to watch in the second-quarter earnings releases will be the sustainability and scale of investment, the visibility of productivity gains to support it, and whether companies can absorb rising semiconductor prices.

Global investment banks are taking a somewhat cautious view. Goldman Sachs said the AI-driven earnings surprises that defined the previous earnings season are unlikely to be repeated in the second quarter. Christian Mueller-Glissmann, Goldman Sachs' head of portfolio strategy and asset allocation research, said the era of large-scale AI-driven earnings surprises is nearing its end. "With market expectations already elevated, it will not be easy for earnings alone to drive a further rally," he said.

Some analysts argue that if the AI investment trend holds, concerns about the chip sector could ease. "A return to trend in share prices will come as expectations for second-half earnings revive," said Na Jeong-hwan, a researcher at NH Investment Securities. "If hyperscalers' earnings reports confirm expanding AI computing demand and a continued upward trajectory in capital expenditure, confidence in semiconductor earnings growth will rise further."