Microsoft’s capital expenditures are the only AI boom town
Yesterday’s earnings from Baidu was quite interesting to watch because according to this recent FT article, China’s largest technology companies such as Baidu, TikTok, Tencent and Alibaba were massive buyers of Nvidia’s GPUs. As we have highlighted in our previous notes it has in fact been the Chinese geographical segment that has increased the most in the previous quarter confirming this hypothesis. We were therefore expecting to see a massive increase in Baidu’s capital expenditures. Why, you might ask? Because AI research and development requires a lot of expensive GPUs and would normally be depreciated and not expensed (it would cause a too big hit to accounting profits). Baidu’s capital expenditures were $371mn in Q2 up from $189mn in Q1 and $279mn in Q4 2022, so Baidu did confirm an increased spending. But to call it a boom would be an understatement as capital expenditures at Baidu were running around $300mn quarterly in the period 2020-2021.
Tencent, another key Chinese technology company, actually reported lower capital expenditures in Q2 compared to Q1 and is investing half of what it used to just two years ago. Alibaba, being classic non transparent, does not show its capital expenditures, so this figure is hidden for investors.
Nvidia’s largest US customers are Amazon, Microsoft, Google, Meta, and Dell. These companies excluding Dell do also capitalise and depreciation investments in GPUs while for Dell the GPUs are expensed over the cost of goods sold with GPUs estimated to be roughly around 20% of PC and laptop sales. Dell’s Q2 revenue was $20.8bn down from Q1 and way less than the $26.4bn in Q2 2022. So it is definitely not Dell that is pushing Nvidia sales higher. It is in fact only Microsoft capital expenditures that exploded in Q2. They were lower for both Meta and Amazon, while the growth at Google was tepid. The chart below shows the total capital expenditures for Baidu, Amazon, Microsoft, Google and Meta. It does not show an explosion in investments.
If we assume that Nvidia’s estimates of demand is correct then the only explanation for capital expenditures figures not aligning well with estimated Nvidia revenue is that the capital expenditures mix has changed dramatically in favour of AI chips under overall restraint on technology spending. Another curious observation is that Nvidia’s revenue is expected to hit $74bn in FY26 (ending 31 January 2026) which would be a significant portion of the capital expenditures spent by the world’s largest technology companies, something that seems a bit too optimistic given the more muted outlook on AI from Microsoft in their recent earnings release.