The investment thesis for chip players remains strong, given their free cash prospects over the next 12 months.
Nvidia (NVDA), Micron (MU), Broadcom (AVGO), and Applied Materials (AMAT) are expected to generate a record $430 billion in combined free cash flow over the next 12 months, according to BofA (see chart below)
That would be more than triple what they generated just two years ago as the companies see unprecedented demand for their AI chips. By contrast, the combined free cash flow of hyperscalers Amazon (AMZN), Alphabet (GOOG, GOOGL), Meta (META), Microsoft (MSFT), and Oracle (ORCL) is projected to turn negative for the first time on record. That represents a massive reversal from the $260 billion peak in free cash flow reported by these companies in 2024. “Chipmakers are becoming cash machines, while AI giants are burning record amounts of capital,” strategists at the Kobeissi Letter said.
Wall Street is growing increasingly impatient with Big Tech’s capital expenditures on artificial intelligence, projected to balloon 70% year over year and exceed $700 billion in 2026. The “Magnificent Seven” stocks are now trading at their cheapest valuation relative to the S&P 500 (^GSPC) in more than a decade, according to Morgan Stanley. The analysis looks at the price-to-earnings multiple premium for the Magnificent Seven relative to the other 493 companies in the S&P 500.