Guotai Haitong North America CSP Earnings Report Summary: Strong Cloud Demand, Continued Capex Investment, Short-term Cash Flow Pressure

According to information from Jinse Finance APP, Guotai Haitong has released a research report stating that in Q3 2026, North American cloud providers showed divergent performance in their core businesses, with strong demand for cloud services. The scale of undelivered orders is close to $2.5 trillion USD. Cloud providers are making aggressive capex investments, putting pressure on cash flow. The bank believes this cash flow pressure is temporary, and as more computing power comes online, the cash flow situation will improve.

Guotai Haitong’s main viewpoints are as follows:

Investment advice: In Q3 2026, cloud demand continued to grow, boosting order visibility. The undelivered orders of Google, Amazon, Microsoft, and Oracle approached $2.5 trillion USD. Cloud providers remain positive about AI investments; capital expenditures will continue to increase in 2027, benefiting sectors along the AI hardware supply chain such as communications. However, the progress of data center construction and the realization of supply chain promises need ongoing verification. At the same time, due to front-loaded capital expenditures and delayed revenue realization, cloud providers will face short-term cash flow pressures and may need to rely on external financing for AI investments. Close attention should be paid to the macro interest rate environment, the growth trend of downstream AI applications, and investment returns. The bank believes that the cash flow pressure is temporary; as more computing power comes into operation, cloud provider revenues in 2027 and 2028 will maintain rapid growth, driving continuous OCF growth and reducing the pressure from capex increases. In the long term, there is no need to worry about the cash flow situation.

Diverging commercial performance among North American cloud providers: Microsoft and Meta exceeded expectations, Google and Amazon underperformed. Microsoft’s FY27 Q1 revenue was $92.3 billion, up 19% year-on-year, with adjusted EPS at $4.89, both above market expectations. Azure revenue grew 48% year-on-year, providing the main support for performance growth. Meta’s Q3 2026 revenue reached $64.6 billion, up 26% year-on-year, driven by an increase in ad volume and pricing, exceeding expectations; after removing legal settlement costs, EPS was $7.40, above market estimates. Google’s Q3 2026 revenue totaled $127.6 billion, up 25% year-on-year but slightly below market expectations. Search revenue growth fell to 12%. Although cloud revenue grew 103% year-on-year, it was still slightly below market expectations. Amazon’s Q3 2026 revenue was $201.9 billion, up 12% year-on-year, with diluted EPS at $1.89. Both revenue and earnings were slightly below market forecasts; AWS revenue grew 39.3% year-on-year, maintaining a fast pace.

The core contradiction in this earnings report lies in the sharp increase in capex and cash flow pressure. Meta raised its capex guidance; Amazon maintained its annual guidance but Q3 exceeded expectations and expects a high-to-low spending pattern between Q3 and Q4. For Q3, the combined FCF gap of Amazon, Google, and Meta was around $44.7 billion. Cloud service providers have generally expressed aggressive stances toward AI investments. The bank expects that in 2027, the negative free cash flow for the three companies excluding Microsoft will further expand, with increased financing needs.

Cloud demand remains robust, growth visibility improving. As of Q3 2026, the undelivered orders for Google, Amazon, Microsoft, and Oracle reached $2.5 trillion USD, an increase of about $160 billion USD quarter-on-quarter. As the base increases, quarter-on-quarter growth slows. Google expects to fulfill 55% of its orders within two years; Microsoft will recognize 30% of remaining performance obligations within one year; Amazon forecasts AWS revenue growth rates in 2027 and 2028 to both exceed 40%. Meanwhile, disruptions exist in computing power supply and the progress of data center construction needs close attention. In Q3 2026, the increased supply of TPUs was delayed, causing Google Cloud to slightly underperform expectations. Entering Q4 2026, tight supply in computing power is prompting Google to use more third-party computing resources. Microsoft also indicated that third-party computing capacity deployment has fallen short of expectations and thus revised down its 2026 capex guidance. Entering 2027, data center construction may face further constraints from electricity, infrastructure, and regulatory policy, requiring close attention to the industry’s implementation pace.

Risk warning: AI chip shipments falling short of expectations, macro interest rate risk, supply chain risk, risk of CSPs’ core businesses being affected by AI technology, intensified competition risk, and AI regulatory risk.