Is storage a "technology safe haven"? Nomura: Valuation has dropped to 2-3 times

The AI arms race among tech giants continues to intensify, causing free cash flow to deteriorate rapidly, while storage chip manufacturers are quietly accumulating cash. Nomura Securities believes there is a fundamental mispricing of the storage sector by the current market.

According to Trading Desk, the Q3 financial reports of the five major technology companies have been released one after another, and their willingness to invest in AI has not waned, but their financial strength is beginning to diverge. Meta’s quarterly free cash flow turned negative for the first time since its IPO, at -$2.1 billion; Alphabet posted negative free cash flow for two consecutive quarters, reaching -$9.1 billion; Amazon’s trailing twelve-month free cash flow gap expanded to -$42.4 billion. Meanwhile, storage chip manufacturers continue to accumulate cash. According to Nomura’s estimates, the expected PE ratios in 2027 for Korean storage giants Samsung Electronics and SK Hynix are just 2-3 times, an 85-90% discount compared to the tech giants.

In the report released on October 30, Nomura points out that current market pricing for the storage sector implies an assumption that profitability has peaked, but the firm clearly disagrees with this view. The report believes that the shortage of storage supply will persist until 2028, long-term supply agreements are on the rise, and a large-scale shareholder return cycle for storage manufacturers is only just beginning. Against the backdrop of overall pressure on the tech sector, storage serves as a “safe haven” worthy of greater attention.

The Nomura report shows that enterprise-level AI investment has evolved into a survival need, and companies are raising funds through operating cash flow, debt, and equity. In the third quarter, only Microsoft maintained a positive free cash flow at +$18.6 billion; Alphabet announced $80 billion in equity financing in June this year and suspended buybacks; Meta issued non-voting Class C new shares and also halted buybacks; Amazon’s long-term debt has risen to about $107.5 billion this year. The capital market’s reaction reflects investor preference directly—Microsoft, with positive free cash flow, saw its stock price remain flat, while Meta, Alphabet, and Amazon fell by 7%, 10-13%, and 5-7% respectively after their earnings reports.

Regarding 2027 capital expenditures, none of the five companies gave specific figures but all clearly indicated they will continue to increase. Citing data from SK Hynix, Nomura reports that global cloud service provider capital spending could rise by as much as 60% in 2027, with total expenditures across the four major hyperscale cloud providers reaching about $1.2 trillion—far exceeding the market consensus expectation of a 30-35% increase. Nomura’s estimates show that under a 60% growth scenario, the combined free cash flow of the four companies would turn negative, reaching -$144 billion in 2027, with funding gaps to be filled by debt and equity financing. Capital will be even more concentrated in firms with stronger financing capability.

In Q3, the combined revenue of the three major cloud platforms—Azure, Google Cloud, and AWS—rose 56% year-on-year to $109.9 billion, with backlog orders reaching as high as $1.82 trillion. AWS and Google Cloud’s operation profit margins hit 38.7% and 36.2% respectively, with profitability continuing to improve. Nomura estimates that with a baseline capex of $5 billion per GW and annual revenue of $1.9 billion, the IRR for cloud data centers is about 6-15%; if calculated based on current spot leasing prices ($4 billion per GW per year), IRR can reach 13-31%.

However, AI’s cannibalization effect on existing core businesses is already evident. Google’s search revenue growth slowed from 17% in Q2 to 12% in Q3, and search volume hit a five-year high, but Google’s own AI models are diluting the monetization efficiency per search. Nomura points out that this means AI investment is not just a growth tool but has become a defensive measure to protect existing business—even Google, an AI-heavyweight, is not immune.

Microsoft, Alphabet, and Meta all reported Q3 capital expenditures below market expectations. Microsoft’s actual spend was $45.2 billion, lower than its guidance of more than $50 billion, due to delays in third-party data center capacity deliveries, with some spending pushed into the first half of 2027. In addition, Microsoft changed the accounting treatment of building lifespans, categorizing new leases as operating leases, reducing the reported capex figure, but the actual spending plan remains unchanged. Alphabet and Meta did not explain the causes for the gap, while Amazon explicitly cited chip (wafer foundry) supply shortages as a bottleneck. Nomura believes that as supply shortages intensify by 2027, the time lag between intent and execution will widen further, becoming the new normal.

Intel’s Q4 revenue guidance is $15-16 billion, below the market’s expected $17 billion, and its stock price fell 21% after the earnings release. Nomura points out that the PC market downturn is a widespread industry problem: rising memory prices and supply shortages caused global PC shipments to drop by about 20% year-on-year in Q3. Intel is also facing unique company-specific challenges, including Intel 3 process and substrate supply shortages, Israeli plant accidents reducing server shipments by about $300 million each for Q4 and the next quarter, and structural constraints making it difficult to shift PC production capacity to servers quickly. Meanwhile, AMD continues to gain market share in both the server and PC markets, and the Arm camp (including NVIDIA Grace/Vera, AWS Graviton, Google Axion, etc.) is also eating into Intel’s server CPU market.

The core argument of the Nomura report is that an entirely opposite cash flow trend is forming between tech giants and storage manufacturers. In theory, the tech giants’ free cash flow should follow a “J-curve”—after the initial heavy asset investments, large-scale operating cash flows would arrive. But for now, negative free cash flow is only just beginning, and the gap may widen further over the next year or two.

In contrast, for storage manufacturers, the starting point for large shareholder returns has also just arrived. Nomura expects that shareholder returns by storage vendors will multiply in the coming years, and after significant shareholder payouts, cash reserves will still rise substantially. Currently, the market assigns a forward 2027 PE of just 2-3 times to the storage sector, compared to an average of about 20.9 times for the four major tech giants (Microsoft 24.3x, Amazon 21.7-23.3x, Alphabet 18.5x, Meta 18.1x), representing an 85-90% discount. Nomura believes the current valuations imply a belief that storage profits have already peaked. However, given that supply shortages will persist through 2028 and long-term supply agreements are on the rise, the market is overly pessimistic about the sustainability of storage profits, making the storage sector a rare “safe haven” in today’s tech portfolio.