The message from executives at major tech companies is clear: prepare yourself: they’re going to pour more money into artificial intelligence. Amazon (AMZN), Alphabet (GOOG, GOOGL), Microsoft (MSFT) and Meta (META) all revealed aggressive new efforts to advance the technology during first-quarter earnings season. These announcements have sparked mixed reactions from investors.
Wall Street is watching how tech giants execute their AI strategies and leverage their balance sheets, but even as the AI boom is fueled by billions of dollars in new investment, shareholders are watching to see where this massive increase in capital spending will lead.
“Given that big tech companies are pouring billions of dollars into the AI boom, investors are wary that this will ultimately lead to overbuilding of infrastructure that doesn’t promise future benefits,” said Nicole Tannenbaum, partner and chief investment strategist at Checkers Financial Management.
This spending surge represents a historic bet for the market, but it’s also a bold show of strength. Management is mobilizing enormous resources. Tech companies and their shareholders are clinging to the promise not just of profitability but of a path to dominance in the next tech era.
“Companies see a huge opportunity in generative AI and see it as potentially a platform shift on par with the internet and the cloud,” said Michael Farr, chief market strategist at Hightower Advisors and founder and CEO of Farr, Miller & Washington.
Spending Mode
Amazon on Tuesday became the latest technology company to warn about rising capital expenditures (capex).
Chief Financial Officer Brian Olsavsky said total capital expenditures are expected to increase “significantly” this year from $48.5 billion in 2023 due to rising infrastructure costs to support AWS growth, including generative AI.
Olsavsky highlighted that generative AI revenues have already reached the multibillion-dollar mark, predicting that many observers are moving into the “show me the money” stage of AI development.
That made the capex numbers easier to swallow. Investors adopted the generally optimistic view, pushing up the stock price. As UBS analysts said in a Wednesday note, “the increase in capex clearly indicates an upward bias in AWS’s forecasts for Q2 2024 and beyond.”
Alphabet surprised Wall Street in its own way: Google’s parent company announced a new dividend program and expanded share buybacks to cushion the blow from ballooning capital spending, which hit $12 billion in the quarter and Chief Financial Officer Ruth Porat said would probably grow.
The story continues
Microsoft also pointed to its massive capital expenditures of $14 billion last quarter as a starting point, with Chief Financial Officer Amy Hood saying the company expects capital expenditures to increase “significantly” due to investments in cloud and AI infrastructure.
Microsoft CEO Satya Nadella speaks at the Microsoft Build AI Day event in Jakarta on April 30, 2024. (Photo: ADEK BERRY/AFP) (Photo: ADEK BERRY/AFP via Getty Images) (ADEK BERRY via Getty Images)
“The biggest lesson to be learned from the huge capital investments being made in AI is that leading companies are not content with making money in the current market and are confident in their ability to expand their revenue base,” Farr said.
The surge in capital spending may be hard to stomach after the tech industry’s COVID-19 downturn and a year of massive layoffs and cost-cutting measures. The infrastructure needed to expand AI is expensive, with big tech companies each putting out estimates that could top $50 billion by 2024.
The ability to invest heavily in cutting-edge technologies with largely unproven business models is itself a reflection of power. Only a handful of companies can afford to spend tens of billions of dollars. The deep pockets of big tech companies are unmatched. But the market is hungry not just for more computing power, but for more advances in AI, Farr said.
That’s one reason why Wall Street hasn’t reacted all that well: Investors slashed Meta’s shares after CEO Mark Zuckerberg said it would take years for the company to see a return on its big AI investments.
But other factors are at play. Meta’s stock price surged ahead of the earnings release, giving investors a big rally. As Baird strategist Ted Mortenson noted after the report, the company’s stock positioning relative to Alphabet’s middling earnings results led to Meta’s stock price being pushed down.
Meta also stands out from other AI companies at big tech companies because the social media company doesn’t have an underlying cloud business on which to sell new AI services.
While Microsoft, Amazon and Alphabet can make money from their AI computing infrastructure and the application of AI to their products, Meta doesn’t have Azure, Amazon Web Services (AWS) or Google Cloud Platform (GCP) to fall back on. Meta naturally has an advertising empire, but its large-scale language model, Llama, is open-source, so monetization is less certain.
“Low uncertainty means high risk, and risk is priced accordingly,” Pharr said. “Zuckerberg asked investors to trust him on this.”
Other companies may get more bang for their buck and be able to afford to spend, but there’s no guarantee that AI will play this early in the game.
Hamza Shaaban is a reporter covering markets and economics for Yahoo Finance. Follow Hamza on Twitter. translation:.
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