Retail Investors Eye Companies with High Facility Investment

Higher CAPEX Growth Rates Drive Better Stock Returns
Nvidia, Alphabet, Meta, Arista Networks, and Others

Last week, it was not the top market capitalization group, but rather the second-largest groups, Broadcom and Oracle, that drove the rise of the S&P 500 Index. This highlighted a positive perspective that gains are spreading across a broader range of stocks within the artificial intelligence (AI) industry. On September 15, Hana Securities stated in its report, "Corporate Investment Awakens Stock Prices," that companies with higher capital expenditure (CAPEX) growth rates-such as Broadcom and Oracle-tend to deliver relatively higher stock returns. CAPEX, which refers to building factories and purchasing machinery, can be interpreted simply as facility investment.

Reasons for Broadcom and Oracle's Stock Price Increases

Broadcom's projected sales growth rate and operating margin for next year are 34% and 66%, respectively, which are somewhat higher or similar to those of Nvidia. Oracle's projections are 21% and 42%, both higher than Microsoft, Alphabet, and Meta. In particular, Oracle's CAPEX has surged. Its CAPEX-to-sales ratio stands at 46%, significantly higher than Microsoft (23%), Alphabet (18%), and Meta (30%).

Lee Jaeman, a strategist at Hana Securities, commented, "Some may argue that this is overinvestment, but despite high market interest rates, the expectation that expanding investments will lead to future sales growth is being reflected in stock prices. This situation is not unique to Oracle; it is similar across other sectors as well." In the S&P 500 this year, companies in sectors driving CAPEX growth and showing high CAPEX growth rates are also projected to have relatively higher sales growth and stock returns in 2025.

CAPEX and ROIC Are Key Factors

According to Hana Securities, investment-led growth is driving sales expansion and stock price increases in the U.S. stock market. Lee Jaeman explained, "For companies with high projected CAPEX and sales growth rates for 2025-2026, there is a strong correlation between return on invested capital (ROIC) and return on equity (ROE). The weighted average cost of capital (WACC), which represents investment costs, is closely linked to the two-year Treasury yield. Therefore, it is important to increase the weighting of companies with a high spread between ROIC and WACC, which reflects investment profitability."

ROIC is an indicator that shows how much after-tax operating profit a company generates relative to the capital invested for its operations. WACC is the weighted average of all the costs a company incurs to raise capital. In corporate valuation, WACC is used as the denominator, so a lower WACC leads to a higher company value.

According to Hana Securities' analysis, companies expected to have CAPEX growth rates of over 10% and sales growth rates of over 8% this year and next year, and a spread of more than 10 percentage points between ROIC and WACC in the third and fourth quarters of this year, include Nvidia, Alphabet, Meta, Arista Networks, Adobe, and Idex.