Three months ago, Wall Street punished the world’s largest technology firms for spending enormous amounts to develop artificial intelligence, only to deliver results that failed to justify the costs.
Silicon Valley’s response this quarter? Plans to invest even more.
Capital expenditure of the four largest internet and software companies — Amazon.com, Microsoft, Meta Platforms and Google — is set to total well over US$200-billion (R3.5-trillion) this year, a record sum for the profligate collective. Executives from each company warned investors this week that their splurge will continue next year, or even ramp up.
The spree underscores the extreme costs and resources consumed from the worldwide boom in AI ignited by the arrival of ChatGPT. Tech giants are racing to secure the scarce high-end chips and build the sprawling data centres the technology demands. To do so, the companies have cut deals with energy providers to power these facilities, even reviving a notorious nuclear plant.
They’re each trying to convince Wall Street that these huge investments will make their future businesses more profitable than the current ones selling digital ads, goods and software.
On an investor call on Thursday, Andy Jassy, Amazon’s CEO, called AI a “really unusually large, maybe once-in-a-lifetime type of opportunity”, evidenced by his company’s projection for a record $75-billion in spending for 2024. “I think our customers, the business, and our shareholders will feel good about this long term — that we’re aggressively pursuing it.” Analysts at MoffettNathanson called Amazon’s spending “truly staggering”.
Mixed bag
A day earlier, Meta CEO Mark Zuckerberg pledged to ramp up investing in AI language models and other futuristic projects he now frames as core to his company’s future. Meta’s capital spending may climb as high as $40-billion this year. Meanwhile, Google parent Alphabet’s capex budget came in higher than Wall Street expectations, and chief financial officer Anat Ashkenazi projected “substantial” increases in 2025.
Apple has also vowed to invest in AI, introducing a suite of services, like a more capable Siri, called Apple Intelligence. But its relatively weak financial results this quarter weren’t helped by its new AI products, which mostly hadn’t arrived.
Read: Why Meta should be lauded for choosing ‘open-source’ AI
Financial results for the tech giants this week were a mixed bag. Shares of Amazon and Alphabet soared after the companies beat earnings expectations, largely on the strength of growth in their cloud computing units. But Meta and Microsoft fell after the former’s spending plans caused jitters, and the latter’s outlook for cloud revenue growth disappointed.
Alphabet, Microsoft and Meta were all up slightly in pre-market trading on Friday, while Amazon rose 6.7% before New York exchanges opened. Apple declined in early trading by about 1.1%.
For Microsoft, its lacklustre quarterly performance came not because customers weren’t lining up to pay for its cloud and AI offerings but because the company couldn’t build capacity quickly enough. “This demand all showed up pretty fast,” CEO Satya Nadella told investors in a call on Wednesday. Data centres, he added, “don’t get built overnight”.
Microsoft spent $14.9-billion in the quarter, a 50% rise from last year — and an amount higher than the company had ever spent on property and equipment in a single year before 2020. CFO Amy Hood told investors Microsoft will work to put its data centre supply issue in a “more balanced position”.
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Analysts were broadly optimistic that Microsoft’s data centre supply difficulties will eventually be straightened out. The issue will “modestly” restrict Microsoft’s cloud business, but the company’s investments, particularly its large stake in OpenAI, are “planting the longer-term seeds for success”, JPMorgan analysts wrote in a note after the company’s results.
Wall Street’s concern with runaway spending isn’t going away. This week Meta reported $4.4-billion in operating losses for Reality Labs, its division that makes augmented reality glasses and other gadgets far from commercial success. The company has also spent heavily to make its Llama models that aim to compete with Google and OpenAI.
On the Meta earnings call, Zuckerberg argued that these AI investments are improving the company’s primary business of selling ads on Facebook and Instagram. But investors will remain nervous about any signs of weakness in the ads business “as they continue to wait for a return on Meta’s bigger AI bets”, said Jasmine Enberg, principal analyst for Emarketer.
Still, Meta’s stock is up 60% this year. And some analysts said Zuckerberg’s big spending will pay off down the line. “Of course, history is on his side,” MoffettNathanson wrote in their report, “and investors now have been trained that patience here is a virtue.” — Mark Bergen and Lynn Doan, with Subrat Patnaik and Henry Ren, (c) 2024 Bloomberg LP
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