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Optimism about AI’s potential to transform the tech industry is spurring increased investment, and a look at Nvidia’s (NVDA) earnings statement shows just how rapid this pace is.
Share prices of some of the market’s largest technology companies making these investments also suggest that investors are generally favorable toward the idea.
And the way management has gotten investors to buy into the idea of spending billions on an AI opportunity that may still be difficult to realize is simple: management is getting paid, too.
Take Alphabet (GOOG, GOOGL), for example.
The company spent just over $32 billion on capital expenditures in 2023, which the company’s annual report defines as spending “primarily reflecting investments in technology infrastructure.” Capital expenditures in 2022 totaled $31.5 billion.
Typically, this is money spent on chips, servers, and raw computing power to run what we experience as a company’s suite of services, such as search, YouTube, and Gmail.
This spending increased substantially as AI dwarfed every other strategic investment Alphabet was considering for its own company.
The company’s capital expenditures in the first quarter reached $12 billion. “For the full year, we expect quarterly capital expenditures to be roughly consistent with or greater than the first quarter,” CFO Ruth Porat said on an investor call last week.
Porat cautioned that the spending could be uneven, but the full-year figure ($48 billion) is roughly 50% higher than what the company spent in each of the previous two years.
To entice investors to join the approach, the company is offering incentives.
Alphabet and Google CFO Ruth Porat speaks at the Milken Institute Global Conference in Beverly Hills, California on May 2, 2022. (Patrick T. Fallon/AFP via Getty Images) (Patrick T. Fallon via Getty Images)
Alphabet began paying a quarterly dividend of $0.20 per share, its first regular dividend in the company’s history, and also increased its share buyback authorization by $70 billion, on top of the $20 billion available under existing programs.
At its current share count, the dividend would cost Alphabet just under $10 billion a year in cash payments to shareholders. In the first quarter, Alphabet bought back $16.1 billion of its own stock.
While increasing share buybacks would slightly reduce dividend cash outflows as the repurchased shares are retired, if the company maintains roughly its current pace of buybacks it should generate quarterly shareholder profits of between $18 billion and $19 billion. On an annualized basis, those figures should be closer to $75 billion.
The story continues
Alphabet’s annual capital expenditures are expected to increase by at least $16 billion in 2024, and investors are more than ready to make up for it.
Now, as Meta (META) learned last week, this support can be fickle.
Meta’s shares fell more than 10% after it raised its spending outlook for this year, a move that came just three months after investors praised the company for the same initiative that Alphabet Inc. announced last week: instituting a dividend and increasing its share buyback authorization.
Meta CEO Mark Zuckerberg told investors that the company’s first-quarter results showed the company “needs to invest significantly over the next few years to build even more advanced models and the largest AI services in the world.”
“But the reality is, even if they shift many of their existing resources heavily toward AI, they will still need to significantly increase their investments before they can realize significant revenue from these new products,” he added.
At least in the meantime, investors will be rewarded for the privilege of waiting — perhaps a windfall from the AI boom.
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