Why are analysts still optimistic about servers despite lower-than-expected capital spending?

  • In the third quarter of 2026, Microsoft and Google’s combined cash capital spending rose 12% quarter over quarter and 109% year over year, but their respective quarterly spending was approximately 14% and 8% below market expectations.
  • Microsoft lowered its calendar-year 2026 capital spending guidance from 175 billion dollars to 170 billion dollars because of delays in the delivery of third-party data center capacity. Management expects the delayed deliveries to shift to the first half of 2027.
  • Google maintained its 2026 capital spending guidance of 195 billion to 205 billion dollars. On that basis, JPMorgan expects Google’s fourth-quarter spending to rise approximately 33% quarter over quarter; Microsoft guided for fourth-quarter capital spending above 50 billion dollars. The bank believes the rebound in spending will support revenue growth across the AI server supply chain over the next several quarters.

How does cloud growth support future investment?

  • Microsoft Azure’s third-quarter revenue grew 48% year over year, up from 43% in the previous quarter. Management guided for fourth-quarter growth of 49% to 50%, above the Bloomberg consensus estimate of 45%. JPMorgan believes strong demand is supportive of continued capital spending.
  • Google Cloud’s third-quarter revenue grew 103% year over year, compared with 82% in the previous quarter. The cloud business’s operating margin rose from 35.6% in the previous quarter to 36.2%. AI-related demand grew, including sales of larger-scale TPU servers.
  • Google Cloud’s backlog reached 561 billion dollars at the end of the third quarter, up more than 50 billion dollars quarter over quarter. Management expects to recognize 55% of that as revenue over the next two years, implying quarterly revenue of more than 39 billion dollars, above the approximately 30 billion dollars recorded in the quarter.

Which parts of the server supply chain stand to benefit?

  • CPUs and GPUs accounted for three-quarters of Microsoft’s third-quarter capital spending, up from two-thirds in the previous quarter. Management expects subsequent spending to be driven primarily by CPUs and GPUs, while also including higher memory and storage costs and delayed capacity deliveries.
  • JPMorgan believes the rising share of hardware spending benefits Microsoft’s server supply chain. Among the suppliers, Hon Hai participates in AI and general-purpose servers, while Wiwynn and Lenovo could benefit from growth in Microsoft’s general-purpose servers. The bank is also positive on the boost to ASPEED from cloud server demand.
  • Google management said spending would increase significantly in 2027, but has not provided specific capital spending guidance.

Why is the PC business moving in a different direction?

  • Microsoft’s third-quarter Windows OEM revenue fell 27% year over year, below the company’s expectations, due in part to weak PC market demand and a high comparison base from last year’s Windows 10 replacement cycle.
  • Management expects fourth-quarter Windows OEM revenue to decline approximately 35% year over year, citing weaker end demand for PCs and elevated inventories. JPMorgan also observed a weakening outlook for PC contract manufacturing orders and softer shipment data from brands to channels, and expects a PC downturn to begin.
  • In PCs, JPMorgan prefers branded manufacturers because of their better margin structures, ranking Lenovo, ASUS and MSI in that order.