Hyperscalers Gear Up for Next Phase of Growth
Hyperscaler shares have surged in recent days, with Microsoft (NASDAQ:MSFT) up 26.5% and Amazon (NASDAQ:AMZN) rising 20.4% over the past five trading days. Alphabet (NASDAQ:GOOGL) has also gained 12.5%. Uncover Alpha's Rihard Jarc believes this is just the beginning of a 'violent' repricing of these stocks.
Jarc argues that despite their high valuations, the multiples for these companies do not appear stretched. Alphabet trades at roughly 17 times earnings with 24% year-over-year revenue growth and an accelerating Google Cloud business. Microsoft carries a P/E near 26, supported by 17.75% revenue growth and a strong operating margin.
The forward setup is also favorable, with several key milestones reached recently. Microsoft's Azure has crossed $100 billion in annual revenue, while Alphabet's Cloud backlog has reached $514 billion. Amazon's AI and custom-chips businesses have both eclipsed a $25 billion annualized run rate.
However, there are risks to consider, particularly the potential for capex to outrun cash flow. Alphabet's free cash flow turned negative in Q2, while Microsoft's FCF fell 23.19% for the year as capex more than doubled.