Webscale Network Operators: 3Q24 Market Review Capex jumps 58% YoY in 3Q24, pushing 12 mo. total over $250 billion; outlook remains strong, but reality check is needed for GenAI

"This report reviews the growth and development of the webscale network operator (WNO, or webscale) market since 2011. It covers 21 companies. In the most recent 12 months (4Q23-3Q24), webscalers represented $2.53 trillion (T) in revenues (+9.1% YoY), $307 billion (B) in R&D spending (+6.5% YoY), and $254B in capex (+32.5% YoY). They had $631B of cash and short-term investments (-11.3% YoY) on the books as of September 2024, and $538B in total debt (-4.1% YoY). The value of webscalers’ net plant, property & equipment (net PP&E) on the books as of September 2024 was $854B, up 25.9% YoY. Webscalers employed approximately 4.226 million (M) people at the end of 3Q24, up 2.3% from the Sept. 2023 total of 4.130M.

Below are highlights from the report:

Revenues: Single quarter revenues in 3Q24 were $638.6 billion (B), up 10.6% YoY. That pushed annualized revenues to $2.527 trillion. Topline growth has been driven by the big 4: Alphabet, Amazon, Meta (FB) and Microsoft. For five straight quarters, all of these companies have recorded double digit revenue growth, well above the rest of the pack. For the 3Q24 annualized period, the fastest growth came from Meta, up 23.1% versus 4Q22-3Q23, followed by Microsoft (+16.4%), Alphabet (14.4%), and Amazon (11.9%). The biggest dollar impact on growth in 3Q24 came from Amazon, as its single quarter revenues grew $15.8 billion from 3Q23 to end 3Q24 at $158.9B, up 11.0% YoY. \

Capex: After declining 5% in 2023, webscale capex has grown at incredibly fast, unsustainable rates in 2024: up by 25%, 51%, and 58% YoY in the first three quarters of the year. 3Q24 capex of $75.6B pushed the annualized total to $253.9B, up 32.5% YoY, and another all-time high. Investor interest in generative AI has spread rapidly, driving GPU spend in the data center. The current investment spike would seem to be inspired by a mix of hype and fear of missing out, as GenAI brings with it a plethora of legal & regulatory risks and relative lack of proven business models. Most recent webscale capex is focused on outfitting existing data centers: from 46% of annualized capex in 3Q22, Network/IT and software capex was 53% of total capex for the latest annualized period. The biggest capex outlays in 3Q24 came from Amazon ($22.6B), Microsoft ($14.9B), Alphabet ($13.1B), and Meta (FB) ($8.3B). These four account for about 80% of single quarter spending. They are the reason behind the unsustainable surge in the price of NVIDIA stock.

Profitability: Webscale free cash flow margins averaged out to 17.6% for the 3Q24 annualized period, a bit lower than a year prior (17.9%) but higher than the 14.1% booked in 3Q22. Average net profit margin for 4Q23-3Q24 was 18.9%, a bit higher than 16.9% in 3Q23. Both profitability metrics are around the same level as in the year before COVID. Meta, Tencent and Microsoft are regularly near or at the top of the heap on both metrics, and this was again the case in 3Q24. The ecommerce specialists Amazon and Alibaba are the laggards, as usual.

Employees: Headcount in the webscale market totaled to 4.23 million in September 2024, slightly up from 4.13 million in September 2023. This difference is negligible, considering the size of some of the webscalers and how quickly the ecommerce specialists in particular can change workforce levels. Amazon’s workforce grew by 51,000 between September 2023 and 2024, for instance. Total webscale headcount has been approximately 4.1 to 4.2 million or so steadily since late 2021. Some of the biggest webscalers are investing heavily in AI and GenAI, with one clear goal being to improve their internal cost efficiencies. This inevitably will mean fewer employees.

Regional trends: The Asia-Pacific region has been a drag on the market for several quarters, and that continued in 3Q24. Webscale revenues in the Americas, Europe, and MEA have been growing in the low double digit range for a few quarters, but AP has been weak: 3Q24 revenue growth was 5% YoY, in line with the last few quarters of low single digit percentage growth. Weak Asian currencies and a very competitive ‘big tech’ market in China account for the gap. Another factor is TikTok. This company, owned by ByteDance, has grown at explosive rates for the last few years, but remains private. We have no reasonable way to include TikTok figures in our database. The ByteDance surge also ate into the 2022-23 growth of some western webscalers, notably Meta (FB), but that effect has ebbed.

The information contained in this report was obtained from both primary and secondary research, supplemented by the expertise of MTN Consulting's analyst team.

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