Capital Intensity Reshapes Tech

Technology may retain a prime position in many investment portfolios on a relative basis, but the gap also could easily narrow, says Jeffrey Goldfarb

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BIG Tech is attempting the mother of all pivots. Although startups from Twitter to Instagram are renowned for remaking their businesses on the fly, none compares to the scale of the transformations underway at Microsoft and other software giants that historically steered clear of owning too much property or equipment.

They are now pouring resources into physical assets, jeopardizing profitability and rich valuations in the process.

It is broadly accepted that capital-intensive businesses typically lead to lower returns. The telecommunications boom of the 1990s, and the massive spending that led to a supply glut, is a prime example of why investors tend to prefer companies with fewer factories, warehouses and other similar holdings, and a greater dependence on intangible ones, such as patents and brands, which are harder to copy and easier to parlay into more income. Simply put, an automaker needs to build more cars and plants to boost sales, whereas Mark Zuckerberg only had to create one Facebook.

The world's biggest tech companies have broadened their focus, however, setting 11-figure capital expenditure budgets, largely for the chips and data centers used to develop artificial intelligence. For now, their core businesses are so profitable that CEOs including Alphabet's Sundar Pichai can pull off these herculean investment feats while still rewarding shareholders. Google's owner just unveiled a third $70 billion stock buyback program in as many years and boosted its annual dividend by 5%, all the while sticking to a $75 billion capital expenditure plan for 2025.