AI Capex - stronger than ever?

Which stocks do you buy to play the theme in Japan?

This edition of the newsletter will do the following:

1. Discuss the current state of Japan’s data center industry.

2. Suggest five Japanese stocks connected to the theme that should be on radar screens.

DeepSeek gave the market a reason to re-examine Chinese technology stocks again. Chinese companies have extremely sophisticated tech whether that’s in self-driving cars, robots or LLMs. It’s the result of an Eisenhower style tech/industrial policy. It’s amazing what can be achieved when Marc Andreesen isn’t involved.

We, in the West, have ignored what has been happening in China since 2018. The press has had their head in the sand and Silicon Valley is acting like the boardrooms of GM or Chrystler did when the Japanese car makers took market share in the 1970s. It’s a mistake.

The implications of DeepSeek for US technology are still being assessed but it is clear it has not curtailed the capex plans of Big Tech in the US. Judging from earnings calls last week, Alphabet, Meta and Amazon will continue to invest in hyper scaling in a big way. It was Amazon, of course, which blew the proverbial doors off. It will invest $105 billion. Yes. That’s 12 digits. All in all, that is $325 billion in capex, a 46% increase YoY!

As discussed, the author is having a tough time believing in the forecasts. And that’s why he has shifted his focus even more to Japan. The data center story there is easier for him to comprehend, and it has a more obvious runway. The stocks might have moved a fair bit over the last few years, but a confluence of factors suggest they still might outperform.

Japan: Growth Market for Data Centers

Three factors suggest the AI data center boom will continue in Japan:

1. The relatively low number of existing data centers.

2. The Japanese government’s concern surrounding who manages the cloud in Japan.

3. Japan’s policy of digitalization.

Small Number of Data Centers

As of March 2024, there were 5381 data centers in the US and 2,100 in Europe. There were only 219 data centers in Japan, less than 5% of the US tally. Interestingly there are only 27 AI data centers equipped with high-performance GPUs essential for generative AI. Those are operated by 18 companies.

This opportunity in Japan has not been lost on the global hyper scalers. Amazon, Microsoft and Google have all announced ambitious plans to expand aggressively in Japan. Amazon announced an additional investment of JPY2.26tr in Japanese data centers over five years from 2023 to 2027. Microsoft plans to invest approximately JPY440bn over two years from 2024 to 2025 to enhance AI computing capabilities at existing data centers. Google invested JPY100bn in Japan over four years from 2021 to 2024, having launched its first data center in Japan in 2023.