Nomura Research Analysis: AI CapEx Race Has No Exit Option, Memory Capacity Already Locked for 2027

Author: Rita

Meta reported a negative free cash flow (FCF) in Q3, Alphabet saw its FCF turn negative for the first time in Q2, and Amazon posted a negative FCF over the past 12 months. The cash flows of three cloud giants are flashing red signals simultaneously, while capital expenditures continue to escalate, driving an unceasing AI race. In a report dated October 23, 2026, Nomura Securities likened this competition to a game of chicken: whoever stops first forfeits their future.

Nomura Securities outlines three scenarios: approximately a 75% probability that the race continues, around 20% for a slowdown, and roughly 5% for financing failure. Under the base case, the tech giants will take on debt, issue equity, and withstand shareholder pressure to continue directing computing power toward internal research and training. Consequently, the semiconductor super cycle will persist, with chip revenue growth decelerating from an already high base, though absolute volume continues to expand.

Shareholder pressure will slow down capital expenditures but will not halt the race. 2027 capacity has already been locked in via Long-Term Agreements (LTA) negotiated in October, with breach penalties ranging from 50% to 100% of the annual demand value. Only a shutdown of the financing market could stop the competition, and Nomura Securities does not view this as a systemic risk yet.

Cash Flow Turns Negative for Three Cloud Giants

Meta posted a negative FCF of $2.1 billion in Q3, with management signaling aggressive investments for 2027 and the board approving new voting-unrestricted Class C shares to finance these initiatives. Alphabet reported a negative FCF of $5.9 billion in Q2, with full-year 2026 capital expenditure guidance between $195 billion and $205 billion. Amazon registered a negative FCF of $7.6 billion over the past 12 months, with 2026 capex projected at approximately $220 billion.

Microsoft still recorded a positive FCF of $19.6 billion in Q4, though the company expects it to turn negative subsequently, with FY27 capex estimated at around $175 billion. Combined, the four companies will exceed $700 billion in capex for 2026. Nomura Securities estimates that nine major semiconductor companies will hold combined net cash of approximately $2 trillion by 2028E, while seven large data center companies will carry combined net cash of roughly negative $350 billion.

The source of funding has shifted. Prior to 2025, operating cash flow covered capital expenditures. In 2026, newly issued equities and bonds are filling the gap as buybacks are paused and shareholders directly absorb the costs. Alphabet raised $49.6 billion in June through common stock and mandatory convertible preferred shares, Meta issued $24.9 billion in bonds in Q2, executed zero share repurchases this year compared to $26.2 billion in the same period last year.

75% Probability the Race Continues

Nomura Securities sets the continuation of the race as the base case, with a probability of approximately 75%. Trigger conditions include sustained strong AI demand growth and continued external financing. The outcome is a prolonged super cycle, with chip revenue growth moderating from exceptionally high levels. While giant stocks may face downward pressure, semiconductor supply chain strength remains undiminished.

A slowdown scenario carries a probability of around 20%. Triggers involve shareholder pressure leading to reduced capex, slowing cloud growth, and emerging FCF deficits and rating pressures. Storage shortages may ease or oversupply risks may rise. Since 2027 capacity is already secured, a slowdown would have limited impact on the 2027 timeline.

From 2028 onward, increased supply and power constraints may loosen the market, with long-term agreements also pre-setting volumes and prices for that year. It remains unclear whether the new agreement structure will stabilize the market, but Nomura Securities believes it guarantees at least a floor profit higher than market expectations.

The financing failure scenario holds a probability of about 5%, triggered by failed bond or equity issuances by the giants. Nomura Securities ranks a hard landing or financial stress as the most destructive scenario, albeit with a low probability. The market is already pricing in marginal players, leaving room for other competitors or customers to absorb excess capacity.

2027 Capacity Already Locked In

Long-term agreement negotiations completed in October fixed the supply volumes and price ranges for 2027. Nomura Securities considers 2027 effectively locked in. Demand far exceeds planned supply, with breaches subject to penalties equal to 50% to 100% of annual demand value. This provides contractual protection for the floor revenue and prices for memory manufacturers in 2027.

Volumes and prices for 2028 will also be pre-set through long-term agreements, though with narrower price bands. It remains uncertain whether the new agreement structure will stabilize the market, but Nomura Securities asserts it ensures at least a floor profit above market consensus. From 2028, increasing supply and power limits may relax market tightness, making the floor-providing role of long-term contracts critical.

Both buyers and sellers agree on the shortage assessment. TSMC CEO C.C. Wei stated that AI demand still outstrips current supply capabilities; Amazon CEO Andy Jassy noted that raising 2026 capex to $220 billion still won't meet total demand for 2026–2027, with 2028 demand already booked; Microsoft CFO Amy Hood said Azure demand continues to exceed available capacity.

Power Shortages Delay Chip Demand

Microsoft CEO Satya Nadella pointed to construction and power connection bottlenecks, noting chips may pile up in inventory. Google CEO Sundar Pichai highlighted that power, High Bandwidth Memory (HBM), TSMC, and over 2,000 components are intertwined, creating potential bottlenecks. Amazon CEO Andy Jassy mentioned that power capacity by the end of 2027 will double compared to 2025.

A Sightline Climate survey shows planned capacity for 2026 exceeds 16 gigawatts, roughly triple that of 2025, with 30% to 50% potentially facing delays compared to a 26% delay rate in 2025. Up to 11 gigawatts show no signs of construction. Nomura Securities concludes that power bottlenecks will primarily cause delays rather than cancellations.

Power shortages will delay chip deliveries, and rising inventories may suppress next-quarter orders. Nomura Securities views this as a tangible downside risk under the base-case continuation scenario, suggesting monitoring via data center project tracking. Per-watt performance gains greater value, benefiting latest chips and high-capacity HBM, while older GPUs may see replacement demand emerge.

Overseas Expansion Absorbs Power Spillover

Excluding China, APAC data center capacity will grow from 16 gigawatts in 2025E to 49 gigawatts in 2030E, with additions concentrated in Johor, Bangkok, and Kuala Lumpur. Europe will expand from 16 gigawatts to 38 gigawatts, driven by growth markets including Northern Europe, Spain, and France. India added 258 megawatts in H1 2026, a 59% YoY increase, reaching a cumulative 1.8 gigawatts, with projections exceeding 7 gigawatts by 2030E. The UAE and Saudi Arabia will collectively add up to 3 gigawatts by 2030E, with the UAE's first 200-megawatt campus targeting completion in 2026E.

Constraints on overseas expansion lie in power availability, land access, grid-connection queues, and approval timelines. Geopolitical risks persist in the Middle East, where non-US data centers faced physical attacks during the 2026 Iran conflict. Nomura Securities believes projects scheduled for 2027 are highly likely to go online, surpassing market expectations, while uncertainties remain for 2028 and beyond.

Financing Market Decides the Race's Endgame

Shareholders cannot halt the race. Founders of Meta and Alphabet retain strong voting rights, making it difficult for external investors to shift direction. With no coordination mechanism among competitors, this is a do-or-die contest involving future opportunities and core business continuity.

Chinese enterprises face different shareholder dynamics. Core businesses like Meta Ads, Amazon Web Services (AWS), and Microsoft Cloud continue generating profits, with significant disparities in cash generation capabilities. Ultimately, the player with the strongest balance sheet will prevail.

Shareholders are also trapped in a prisoner's dilemma. If everyone slows down collectively, industry FCF improves; if one firm slows alone, rivals seize its position. Driven by mutual distrust, each continues investing, resulting in an equilibrium of "everyone proceeds." Nomura Securities concludes shareholder pressure is more likely to moderate capex growth rates rather than stop the race entirely.

Only a closed financing market can stop the competition. This represents the primary potential downside for semiconductor demand, with markets already pricing out marginal players. Nomura Securities maintains this is not yet a systemic risk, as other competitors or customers could absorb the capacity. After 2027 capacity is secured, 2028 variables will pivot from orders to power availability and financing.

As long as the financing market remains open, the memory super cycle will not come to a halt on its own.

Disclaimer

This article compiles and interprets a third-party brokerage research report (Nomura Securities, October 23, 2026) alongside public market information. The ratings, target prices, earnings forecasts, and related judgments cited herein reflect the views of that brokerage's analysts, represent only their institution's stance, do not constitute the views of TechFlow Research, and should not be construed as investment advice.

The market involves risks, and decisions must be independent. This article should not serve as the basis for buying or selling any securities.