We recently held our quarterly Investment Committee meeting and during our discussion of US equities, we found ourselves asking some fundamental questions about current trends in the equity market. It seems like almost every day, we read about technology companies promising substantial investments in artificial intelligence (AI). Just this morning we learned that Alibaba, the Chinese based e-commerce company, said that they would “ramp up AI spending past an original $50-billion plus target”,1 which sent shares higher.
At SS&C ALPS Advisors, our research focus in equities centers on return on invested capital (ROIC). Given these announcements of future capital investments from large tech companies, we asked ourselves how this spending could impact future ROIC at these firms.
Getting back to what we learned in Finance 101, there are only two ways a firm can increase ROIC: either earning more profit on sales (margins) or generating higher sales on a given asset base (asset turns). This relationship can be shown mathematically as Margins X Turns = ROIC, or:
(Income/Sales) X (Sales/Invested Capital) = ROIC
When announcements like these cause share prices to increase, we can probably assume that investors believe these investments, which will increase the invested capital base, will lead to increased revenue growth in the future.
In general, technology companies invest in future revenue growth in two ways. First, capital expenditures (CapEx) (e.g. building data centers), and second, research and development (e.g. Cloud capabilities). We believe observing trends in these outlays can give us insights into management’s strategy. To serve as an example, we highlight CapEx trends at Amazon (AMZN) below:
Over the past several years, as a percentage of revenue, CapEx has increased from ~5% to almost 20%. At the same time, revenue growth, which was consistently over 20% through 2020, has slowed to approximately 10% in recent years. It appears that Amazon's management believes that future revenue growth will accelerate with these investments.
We don’t have a crystal ball, but evaluating the recent news through the ROIC framework can help us better understand what’s priced into equity valuations. Future financial reports from these companies will reveal the extent to which these investments are successful.
Important Disclosures & Definitions
1 Ding, L. (09/24/2025). Alibaba Shares Soar After Hiking AI Budget Past $50 Billion. Bloomberg.
AAI001007 09/30/2026