Written by: Rita

Since July 1, the Philadelphia Semiconductor Index has dropped 16%, while the S&P 500 has risen 3% during the same period. What is the market worried about? Concerns are growing regarding the peak of capital expenditure among hyperscale operators, negative free cash flow, and unsustainable ROI for AI investments.

In its global technology report released on August 12, HSBC provided a completely different assessment. Through scenario analysis, HSBC believes CSPs (cloud service providers) are fully capable of leveraging their capital expenditure above market consensus without significantly eroding return on invested capital (ROIC). The profitability trend of AI semiconductors is far from reaching a turning point.

The market misreads the leverage capacity of CSPs

The market's worries about CSP capital expenditures center around two figures: consensus forecasts indicate that CSP capital expenditure growth will plummet from 95% in 2026 to 46% in 2027, and further down to 11% in 2028; simultaneously, the free cash flow of the five major CSPs (Alphabet, Amazon, Microsoft, Meta, Oracle) is expected to drop from $34 billion in 2026 to a negative $104 billion in 2027.

HSBC believes that negative free cash flow does not need to be overly interpreted; the key is whether there is the capacity to borrow money to fill the gap.

HSBC made three sets of scenario assumptions: if CSPs raise capital expenditure from the consensus of $1.068 trillion in 2027 to between $1.0 trillion and $1.6 trillion, they would need to incur additional debt of $380 billion to $638 billion, with the net debt/equity ratio rising from the current 7% to between 8% and 30%. If capital expenditure reaches between $1.9 trillion and $2.5 trillion in 2028, the net debt/equity ratio would rise to between 25% and 43%.

HSBC's assessment is that a net debt/equity ratio of 30% to 43% is completely manageable for large technology companies with stable cash flow and quality assets.

Declining ROIC is not a fatal risk

Another market concern is the continuous decline in ROIC. Consensus data shows that the ROIC of the five major CSPs has dropped from 35% in 2024 to 29% in 2025, and is expected to fall to 22% in 2026, remaining at 22% and 21% in 2027 and 2028, respectively.

HSBC's scenario analysis assumes a significant increase in capital expenditures: $1.3 trillion in 2027 and $2.2 trillion in 2028. Under this assumption, ROIC in 2027 will drop from 22% to 19%, and in 2028 from 21% to 17%.

HSBC believes that a ROIC of 17% to 19% is still an acceptable return level. This level is sufficient to cover the cost of capital and supports the strategic asset of AI infrastructure. In HSBC's view, the market's concerns about ROIC have been exaggerated; while return rates are declining, it is far from needing to hit the brakes.

Semiconductor equipment expansion has demand support

TSMC, Intel, and ASML all provided expansion guidance that exceeded market expectations in their June quarterly reports. TSMC raised its 2026 capital expenditure guidance from $52 to $56 billion to $60 to $64 billion and announced an additional $100 billion investment in Arizona (previously announced $165 billion). ASML plans to increase EUV capacity by 30% in 2027 and is studying a further 30% increase in 2028.

However, the market's reaction to the expansion news has been negative. The stock prices of TSMC, Intel, and ASML fell after their earnings releases, with the SOX index underperforming the S&P 500 by about 19 percentage points. The market interpreted the expansion as a sign of "overcapacity," while HSBC believes it is "proof of sustained demand."

HSBC's logic is that CSPs have enough leverage capacity to support capital expenditure until 2028, and the semiconductor equipment companies' expansion plans are clearly supported by demand. The current decline in SOX is an overreaction of market sentiment rather than a substantial deterioration of fundamentals.

HSBC names four leading AI semiconductor targets

HSBC recommends Marvell, Intel, TSMC, and ASML in the AI semiconductor field, believing that all four companies have unique driving factors and are expected to continue exceeding market expectations in 2027. The target prices set by HSBC are: Marvell at $300 (buy, 44% upside), Intel at $200 (buy, 105% upside), TSMC at NT$3,400 (buy, 43% upside), and ASML at €2,149 (buy, 42% upside).

Additionally, HSBC maintains buy ratings for all five major CSPs, believing that the capital expenditure cycle is far from over. The target prices are: Alphabet at $420 (17% upside), Amazon at $310 (11% upside), Microsoft at $595 (18% upside), Meta at $830 (40% upside), and Oracle at $316 (109% upside).

Whether CSPs can continue their capital expenditure hinges not on ability, but on willingness. HSBC provided a quantitative answer through scenario analysis: if they want to continue, there is enough leverage space. The market's panic about the peak of AI capital expenditure essentially equates "turning negative free cash flow" with "running out of money," but HSBC believes these two concepts cannot be directly equated.

Disclaimer

This article is a compilation and interpretation of a third-party broker research report (HSBC, August 12, 2026) by ChaoXiang Research, combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments cited in this article are the opinions of the broker's analysts and only represent their institution’s position, and do not reflect the views of ChaoXiang Research, nor do they constitute any investment advice.

The market carries risks, and decisions should be made independently. This article should not be used as a basis for buying or selling any securities.