Big Tech's AI Spending Surge

Sebastien Callebaut -

Capital Expenditures Soar Beyond $200 Billion

Big Tech's capital spending is projected to surpass $200 billion this year, with further increases anticipated in 2025. This wave of investment, primarily focused on artificial intelligence (AI), has sparked anxiety on Wall Street about the potential returns on these substantial expenditures. The four largest U.S. tech giants — Microsoft, Meta, Amazon, and Alphabet (Google's parent company) — have highlighted how their AI investments are enhancing core services and optimizing operating costs.

  • A wave of caution is hitting these stocks as investors looked beyond the projected benefits to the tangible rise in spending, particularly on chips and data center infrastructure, as the AI race intensifies.
  • According to recent financial reports, capital expenditure at these major tech companies grew by more than 62% year-on-year, reaching roughly $60 billion for the quarter.

Both Meta and Amazon indicated that this spending surge is expected to continue into next year.

Data Centers Driving the Bulk of Spending

Analysts at Citi predict that total capital spending by these companies will reach $209 billion by the end of this year, representing a 42% increase over 2023, with data centers accounting for nearly 80% of that amount. However, industry experts and investors alike are questioning the ultimate benefits. Jim Tierney, a growth stock investor at AllianceBernstein, remarked on the pressure these expenses are placing on profit margins, which he expects will become even more noticeable in 2025.

  • Microsoft and Google have seen accelerated growth in their cloud divisions, hinting that demand for generative AI is beginning to bolster their performance.
  • However, Microsoft tempered optimism by cautioning that its cloud growth could slow due to supply limitations, while Amazon Web Services (AWS) didn't meet the most optimistic expectations for growth, despite reporting solid profit margins.

AI Impact Remains Vague for Investors

During earnings calls, companies like Alphabet shared mostly anecdotal evidence of AI-driven benefits. Alphabet mentioned that new generative AI features in its search engine are increasing user engagement, while Microsoft revealed its annual AI revenue is close to hitting $10 billion, marking it as one of the company's fastest-growing business lines.

  • However, outside of these few disclosures, the impact of AI on overall revenue remains unclear, leaving investors uncertain about the true value of these investments.
  • Facing questions from investors, executives from several companies stressed that this increase is closely tied to market demand, and that capital efficiency will likely improve as their operations scale.
  • Both Amazon and Microsoft compared the current surge to the early days of cloud computing, when building out data centers required significant upfront investment.

To offset some of these expenses, companies like Microsoft, Alphabet, and Amazon have adjusted their depreciation policies for data center equipment, extending the useful life of these assets. Amazon, for instance, reported that extending its server life by one year boosted its cloud profit margin by 2 percentage points last quarter.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Albert Stoynov / Unsplash.