Pershing Square's third-quarter shareholder letter, written by William Ackman and Ryan Israel, describes hyperscaler capital spending as offensive rather than defensive. It says investors focus on costs and overlook future revenue, cash flow and returns, and it also addresses Amazon, Microsoft and Uber.
In a recent shareholder letter, Pershing Square CEO William Ackman and CIO Ryan Israel described hyperscalers' capital spending as offensive rather than defensive. Pershing Square argues that the spending is an offensive growth investment rather than a defensive cost, and that investors are underestimating the revenue it will generate. Ackman and Israel wrote that hyperscalers are investing to accelerate growth, deploying capital behind a transformative technology that plays directly to their competitive advantages rather than merely protecting existing franchises. Pershing Square holds Microsoft, Meta and Amazon in its portfolio.
Stock performance lags earnings growth
Microsoft, Meta Platforms, Amazon and Alphabet delivered an average share price increase of just 8% despite approximately 27% earnings growth. Through roughly September 30, that 8% average compared with a 44% gain for the S&P 500 Semiconductor index. The technology hardware index has gained 36% this year. Pershing Square said the decline in hyperscalers' P/E multiples has largely been driven by investor concerns about potential returns on their elevated capex spending.
Scale of the spending
Consensus estimates put hyperscaler capital expenditures at a little over $1 trillion in 2027, up from roughly $740 billion expected in 2026 and $140 billion in 2023. Capital spending was nearly 12% of the group's revenue in 2023 and is estimated at 38% in 2026. Meta's free cash flow was negative $2.1 billion in the third quarter, while Microsoft generated $18.6 billion in its latest quarter.
The case for returns
Ackman and Israel concluded that hyperscalers can finance the substantial majority of their capital expenditures from the cash flows of their core businesses. Pershing Square believes Wall Street focuses too much on rising infrastructure costs while overlooking future revenue growth, stronger cash flows and returns. It said analyst estimates penalize the hyperscalers for the cost of the buildout today while ascribing limited potential to future revenue and earnings growth. Pershing estimates one gigawatt of AI data center capacity costs $40 billion to $50 billion and produces $15 billion to $20 billion of annual revenue. At a 50% incremental margin, that implies a pre-tax return on invested capital of 15% to 25%. Pershing Square sees potential for hyperscaler revenues to run 15% to 35% above consensus within three years. If revenue falls short, the letter argues, companies will cut spending and free cash flow will beat consensus anyway.
Company views: Microsoft, Amazon and Uber
The letter said Microsoft has two large channels to monetize its compute and that the narrative on the stock has shifted from AI laggard to AI leader. It said AI has helped AWS accelerate its revenue growth to 39% in the third quarter, and that Amazon is extremely well positioned across the AI stack. Pershing Square said Uber trades at its lowest valuation ever and that the risk from autonomous vehicles is minimal. The letter added that investor concerns about autonomous vehicles are increasingly disconnected from Uber's strong business performance, and that its EPS will compound at 25% or more for the foreseeable future.
Broader market backdrop
In its third-quarter letter, Pershing Square said the S&P 500 advanced slightly more than 2% in Q3, but the typical company in the index fell 4%, and more than 60% of constituents ended the period lower. Through Sept. 30, the S&P 500 had climbed 13% for the year, while the average constituent gained just 1%. Estimates for the median S&P 500 company's earnings per share rose 4% during Q3 and nearly 10% over the first nine months.
