Cathay Pacific Haitong North America CSP Financial Report Summary: Strong Cloud Demand, Capex Continues to Invest in the Cash Flow Under Pressure in the Short Term

The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that in 26Q3, the main business performance of North American cloud vendors was divided, demand for the cloud business was strong, and the scale of undelivered orders was close to 2.5 trillion US dollars. Cloud factories actively invested in capex, causing cash flow pressure to be pressured. The bank believes that cash flow pressure is temporary, and the cash flow situation will improve as more computing power is put into operation.

Cathay Pacific Haitong's main views are as follows:

Investment suggestions: 26Q3, cloud demand continues to grow, order visibility increases, and undelivered orders from Google, Amazon, Microsoft, and Oracle are close to 2.5 trillion US dollars; cloud factories' investment statements on AI are still positive, capital expenditure will continue to increase in '27. AI hardware industry chains such as communications are expected to benefit, and data center construction progress and supply chain implementation are yet to be continuously verified. At the same time, as capital expenditure is ahead and revenue is more advanced, short-term cloud factories will also face cash flow pressure. They will need to use external financing to invest in AI, and they need to pay close attention to the macro interest rate environment, the growth trend of downstream AI applications, and return on investment. The bank believes that cash flow pressure is temporary. As more computing power is put into operation, cloud factory revenue will continue to grow rapidly in 2027 and 2028, driving OCF's continued growth, and Capex's growth pressure will decrease. In the long run, there is no need to worry about the cash flow situation.

The performance of North American cloud vendors was divided. Microsoft and Meta exceeded expectations, while Google and Amazon fell short of expectations. Microsoft's FY27Q1 revenue was US$92.3 billion, up 19% year on year. The adjusted EPS was 4.89 US dollars, all higher than market expectations; Azure revenue increased 48% year over year, providing the main support for performance growth. Meta26Q3's revenue was US$64.6 billion, up 26% year on year. The sharp rise in advertising volume and price drove revenue to exceed expectations; after excluding legal settlement fees, EPS was $7.40, higher than market expectations. Google's 26Q3 revenue was US$127.6 billion, up 25% year on year, slightly lower than market expectations, and search revenue growth fell back to 12%; although cloud revenue increased 103% year over year, it was still slightly lower than market expectations. Amazon's revenue in Q3 was US$263 billion, up 12% year on year, and diluted EPS was 1.89 US dollars. Both revenue and profit were slightly lower than market expectations; AWS revenue increased 39.3% year over year, maintaining a relatively rapid growth rate.

The core contradiction in this financial report is that Capex is growing rapidly and cash flow is under pressure. Meta raised Capex guidelines, and Amazon maintained full-year guidance, but Q3 exceeded expectations. Q3Q4 is expected to be a high and low spending rhythm; Amazon, Google, and Meta have a Q3 FCF gap of about 44.7 billion US dollars. CSP is generally positive about AI investment. The bank expects that the negative free cash flow of the three companies other than Microsoft will expand further in '27, and demand for financing will rise.

Demand for the cloud remains strong, and growth visibility is increasing. As of 26Q3, undelivered orders from Google, Amazon, Microsoft, and Oracle reached 2.5 trillion US dollars, an increase of about 160 billion US dollars over the previous month. As the base figure increased, the month-on-month growth rate slowed. Google orders are expected to be absorbed 55% within 2 years, and Microsoft's 30% RPO is confirmed within one year; Amazon's revenue growth rate of AWS 2027 and 2028 is expected to exceed 40%. At the same time, the supply of computing power is disrupted, and the progress of data center construction needs to be focused on. The 26Q3 TPU launch was delayed, and Google Cloud fell slightly below expectations. Entering 26Q4, the supply of computing power is tight, and Google will also use more third-party computing power; Microsoft also indicated that the deployment of third-party computing power production capacity falls short of expectations, thereby lowering the 2026 capital expenditure guidelines. Entering 27 years, data center construction may be further restricted by electricity, infrastructure, regulatory policies, etc., and we need to focus on the progress of industrial implementation.

Risk warning: AI chip shipments fall short of expectations, macro interest rate risk, supply chain risk, risk of CSP's original main business being impacted by AI technology, increased competition risk, and AI regulatory risk.