CMB International: AI Investment Impact on Leading Tech Companies' Profitability is Manageable, Favoring Microsoft, Google, Amazon, etc.

According to a report by Jinse Finance on June 22, CMB International released a report stating that after reviewing the Q1 performance of leading overseas TMT companies, it observed that revenue and profit forecasts for leading tech companies for FY2026 have been further revised upward, driven by strong AI computing power demand and the continued empowerment of core businesses by AI. However, several companies have also raised their capital expenditure guidance, leading to short-term pressure on free cash flow. From a medium- to long-term perspective, the firm believes that AI investment's impact on leading tech companies' profitability is manageable, with overall operating profit growth expected to remain above 20% in FY2027/2028. Although free cash flow ratios may face short-term pressure due to capital expenditures, they are expected to reach a turning point and rebound starting FY2028. The firm noted that the software sector's overall valuation has somewhat recovered following recent earnings, with profit forecasts being steadily revised upward. However, performance within the sector remains relatively mixed. Enterprise application software has shown stable performance overall, while infrastructure software has benefited more actively from AI trends. Looking ahead, the firm believes the key to determining fundamentals and stock prices lies in whether companies can achieve sufficiently high returns and ROIC from AI investments to support stable short-term performance and sustainable medium- to long-term profit growth. Based on current fundamentals and valuation levels, the firm recommends Microsoft, Google, Amazon, Palo Alto Networks, and Meta.