Capital spending by Big Tech companies is expected to exceed $200 billion this year and rise further in 2025, as Wall Street worries about the returns from surging investment in artificial intelligence.
The big four US internet groups (Microsoft, Meta, Amazon and Google’s parent company Alphabet) this week gave investors a brief glimpse of the benefits they could get from a plunge into generative AI that could improve the performance of their core services. and reduce operating costs.
But the stock market on Thursday showed investors ignoring the imprecise benefits and focusing on another big, and very measurable, spike in spending on chips and data center infrastructure as the AI ​​race accelerates. As a result of his guess, he suffered from convulsions.
Capital spending at the four hyperscalers rose more than 62% year-over-year in the quarter, to about $60 billion, according to this week’s financial reports. Meta and Amazon are among the companies that have pointed to further increases in spending next year.
Citi analysts predict the Quartet’s total capital spending will reach $209 billion this year, up 42% from 2023. Citi estimates that data centers account for about 80% of that total.
“What are the real benefits?” Jim Tierney, a growth investor at AllianceBernstein, expressed a common concern. He added that “all of these companies are spending huge sums of money, and as a result, the hit to margins will be “even more pronounced in 2025.”
One sign that demand for generative AI is starting to boost Big Tech’s growth rates comes from the accelerating growth of Microsoft and Google’s cloud divisions.
However, optimism quickly faded when Microsoft continued to warn that cloud growth would slow this quarter, primarily due to supply constraints. Meanwhile, cloud market leader Amazon Web Services buoyed investors with unexpectedly high profit margins, but failed to live up to the most optimistic expectations of accelerating its own growth.
Companies that peppered their earnings calls this week with anecdotal and mostly vague assurances about the benefits of AI included Alphabet, which said its search engine’s new generative AI capabilities were driving increased engagement and usage. Ta. He also said that a quarter of the software produced by the company is now written by AI.
Despite this, Google’s search volume growth was down from the previous quarter, raising questions about how strong the AI ​​effect was, Tierney said.
But Microsoft said it is on track to reach $10 billion a year in revenue from AI, reaching that milestone faster than any other business to date. The company also said Copilot, an AI feature that costs $30 per user per month, had the “fastest growth of a new suite” ever seen in its M365 productivity software.
Brent Till, an analyst at Jefferies, said the $10 billion figure is rare because specific revenue numbers are disclosed and early evidence of the real benefits that could start to emerge from generative AI. He said that.
But few other software companies have disclosed anything about the impact AI will have on their revenues, he added, leaving the stock market worried. “It’s murky, and investors are worried about the cost,” Till said.
Meanwhile, Meta told investors that AI has increased profits from advertising and improved engagement among users, while AWS said its “multi-billion dollar” AI business is more than 100% said that it is growing at a rate of
If such anecdotes are encouraging but ambiguous, it is clear that spending on new data centers and equipment for AI is rapidly increasing.
Executives at several companies, facing severe criticism from investors, argue that the massive increase in facilities processing AI is closely tied to demand and that capital efficiencies will improve as the scale of operations increases. did.
Amazon and Microsoft executives drew comparisons to the early days of the cloud computing business. At the time, building and equipping data centers was also causing a sharp increase in spending.
Amazon CEO Andy Jassy said the company has strong upfront buying signals from customers, allowing the company to time investment spending closer to actual demand. Amy Hood, Microsoft’s chief financial officer, said about half of the company’s capital spending goes toward purchasing servers, which it may buy as demand increases.
Despite claims of investment discipline, investors were left with the reality that increased spending will hit Big Tech’s income statements next year, even as revenue returns are uncertain. .
Meta, for example, warned that “infrastructure spending growth will accelerate significantly” in 2025 as the introduction of new data centers increases depreciation and operating costs.
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Recent changes to Microsoft, Alphabet and Amazon’s depreciation policies should ease the pain. All three companies extended the useful life of their data center equipment for accounting purposes and reduced the depreciation expense they had to report each year.
Amazon said extending the useful life of its servers by one year boosted its cloud division’s margins by 2 percentage points in the latest quarter. This is the second time in two years.
But even with moves to defer depreciation and amortization further, it will be difficult to avoid pressure on profits from a surge in AI spending.
After two years of strong gains, this could mark a turning point as earnings expectations for Big Tech companies steadily rise. The tech-heavy Nasdaq Composite Index closed 2.8% lower on Thursday, with Microsoft, Meta and AI chip maker Nvidia collectively shedding more than $400 billion in value.
As of Friday morning, shares of Meta and Alphabet were nearly flat, while Microsoft and Amazon were up 1% and 7%, respectively. Nvidia rose 3%.
“Investors are wondering whether the days of ‘win-and-make’ (in quarterly earnings releases) are over,” Tierney said. If so, the chaos that hit markets on Thursday could be a sign of more volatile times ahead.
