Investing.com -- Investment in Generative AI (GenAI) remains a top priority for major hyperscalers, with Morgan Stanley (NYSE:MS) now projecting $315 billion in capex for 2025 and $367 billion for 2026.
The firm believes that despite rising capital expenditures, the companies best positioned to monetize GenAI return on invested capital (ROIC) will likely outperform.
"We update our hyperscaler capex forecast, now modeling total capex of $315bn/$367bn in ’25/’26," said Morgan Stanley.
The firm noted that free cash flow (FCF) forecasts for Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), and Amazon (NASDAQ:AMZN) have declined over 20% year-to-date due to increased spending.
However, Morgan Stanley remains supportive of these investments, stating, "We agree with the investment, but these trends are why GenAI ROIC will remain in focus and why ’GenAI winners’ are likely to outperform."
Following recent earnings reports from mega-cap tech firms, Morgan Stanley increased its 2025 capex forecast by 10%, or $28 billion.
The bank’s analysts explained, "Our ’26 FCF numbers have now fallen ~20-25% year-to-date as capex ramps ahead of return."
The firm stressed that the ability of companies to generate material incremental engagement revenue through GenAI and large language models (LLMs) will be critical in justifying this spending.
Looking at overall trends, "Following 70% growth in ’24, we expect hyperscale capex to grow 39%/17% in ’25/’26," Morgan Stanley said. The firm sees continued multi-year opportunities in GenAI and remains positive on the outlook for leading hyperscalers, including Amazon, Alphabet, Meta, and Microsoft (NASDAQ:MSFT).