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In a commendable moment of self-awareness, Mark Zuckerberg admitted this week that Meta Platforms’ massive artificial intelligence investment is “not what investors want to hear.” He may be speaking on behalf of the big technology companies that have recently announced their earnings. Investors want to know more about how these initiatives will play out.
Amazon added to the pile of investment and uncertainty Thursday. The e-commerce group said it will spend $75 billion this year, an increase of more than 50%, primarily on data centers and servers for its Amazon Web Services unit. Chief Executive Officer Andy Jassy, like Mr. Zuckerberg, Alphabet Inc. and Microsoft Inc., cushioned the blow with sales and profit growth that easily exceeded analysts’ expectations.
Silicon Valley executives are doing everything they can to show discipline, rolling up their sleeves and cutting costs. It manifests itself as wider operating margins and, in some cases, sharper elbows. Facebook owner Mehta has fired several staff members for allegedly misusing meal allowances. Amazon wants employees to return to the office to increase productivity, but some are disappointed.
However, there is still too much ambiguity about future returns. When asked how large the investment will be next year, executives are reluctant. Mr. Jassy said Amazon would “further increase” spending, Alphabet’s finance chief showed signs of “increase” and Mr. Mehta warned of a “significant acceleration.” Some companies are already making money from AI, but no one is sure how much more money will be made and when.
Even if investors cannot predict with confidence, they can at least measure it. It could even do away with the outdated accounting ratio of fixed asset turnover. It expresses revenue as a multiple of the number of holdings in real estate, computers, data centers, and other chunky objects. Standards vary by industry. For example, a brick-and-mortar retailer might aim for a 2.5x ratio. An efficient Walmart manages five.
With the advent of cloud computing and AI, the proportion of tech giants has declined. A decade ago, Amazon and Microsoft had roughly six times higher fixed asset turnover, according to S&P Capital IQ. Today, both manage about two. Meta went down from 4 to 1, Alphabet went down from 3 to 2. While each company has grown its sales significantly, the amount of hard assets on its balance sheet is growing even faster.
It will be worth watching how long it will take for these numbers to return to something like the good old days. However, the era of truly low wealth is probably over forever. Jassy suggested Thursday that the AI race is a once-in-a-lifetime opportunity and that if all goes well, “shareholders will be happy.” Favorability drives stock prices up. It doesn’t hurt to have more concrete indicators of success.
john.foley@ft.com
