Guotai Haitong North America CSP Earnings Summary: Strong Cloud Demand, Sustained Capex Investment, Short-Term Cash Flow Pressure

Guotai Haitong released a research report stating that in 26Q3, the core business performance of North American cloud vendors diverged, cloud business demand was strong, the scale of undelivered orders approached US$2.5 trillion, and cloud vendors actively invested in capex, putting pressure on cash flow. The bank believes that cash flow pressure is temporary, and as more computing power is put into operation, cash flow conditions will improve. Guotai Haitong's main views are as follows: Investment recommendation: In 26Q3, cloud demand continued to grow, order visibility improved, and the undelivered orders of Google, Amazon, Microsoft, and Oracle approached US$2.5 trillion; cloud vendors remain positive in their statements on AI investment, and capital expenditure will continue to increase in 27, with communications and other AI hardware industry chain segments expected to benefit. Data center construction progress and supply chain fulfillment still need continuous verification. At the same time, because capital expenditure is front-loaded and revenue recognition timing is later, cloud vendors will also face short-term cash flow pressure and need external financing for AI investment. Close attention should be paid to the macroeconomic interest rate environment, the growth trend of downstream AI applications, and investment returns. The bank believes that cash flow pressure is temporary. As more computing power is put into operation, cloud vendor revenue will maintain rapid growth in 2027 and 2028, driving continued growth in OCF, reducing Capex growth pressure, and in the long run, there is no need to worry about cash flow conditions. The performance of North American cloud vendors diverged, with Microsoft and Meta beating expectations, while Google and Amazon fell short. Microsoft FY27Q1 revenue was US$92.3 billion, up 19% year on year, and adjusted EPS was US$4.89, both above market expectations; Azure revenue grew 48% year on year, providing the main support for performance growth. Meta 26Q3 revenue was US$64.6 billion, up 26% year on year, with both advertising volume and price rising to drive revenue above expectations; excluding legal settlement expenses, EPS was US$7.40, above market expectations. Google 26Q3 revenue was US$127.6 billion, up 25% year on year, slightly below market expectations, with search revenue growth slowing to 12%; although cloud revenue grew 103% year on year, it was still slightly below market expectations. Amazon 26Q3 revenue was US$201.9 billion, up 12% year on year, and diluted EPS was US$1.89, with both revenue and profit slightly below market expectations; AWS revenue grew 39.3% year on year, maintaining rapid growth. The core contradiction in this earnings season lies in the surge in capex and pressure on cash flow. Meta raised its Capex guidance, Amazon maintained its full-year guidance but Q3 exceeded expectations, and Q3 and Q4 are expected to show a spending pace of high first and low later; the Q3 FCF gap for Amazon, Google, and Meta was about US$44.7 billion. CSPs generally expressed positive views on AI investment. The bank expects that in 27, the negative free cash flow of the three companies other than Microsoft will further widen, and financing demand will rise. Cloud demand remains strong, and growth visibility has improved. As of 26Q3, the undelivered orders of Google, Amazon, Microsoft, and Oracle reached US$2.5 trillion, an increase of about US$160 billion quarter on quarter, with the quarter-on-quarter growth rate slowing as the base increases. Google's orders are expected to be digested 55% within 2 years, and 30% of Microsoft's RPO will be recognized within one year; Amazon guides that AWS revenue growth in both 2027 and 2028 is expected to exceed 40%. At the same time, computing power supply faces disruptions, and data center construction progress needs close attention. In 26Q3, TPU ramp-up was delayed, and Google Cloud was slightly below expectations. Entering 26Q4, computing power supply is tight, and Google will also use more third-party computing power; Microsoft also stated that third-party computing power capacity deployment fell short of expectations, and therefore lowered its 2026 capital expenditure guidance. Entering 27, data center construction may be further constrained by power, infrastructure, regulatory policies, and other factors, and close attention should be paid to industry implementation progress. Risk warnings: AI chip shipments falling short of expectations, macroeconomic interest rate risk, supply chain risk, risk of CSPs' original core businesses being impacted by AI technology, intensifying competition risk, and AI regulatory risk.