The message from Big Tech executives is clear: Buckle up, we're going to spend a lot more money on artificial intelligence. Amazon (AMZN), Alphabet (GOOG, GOOGL), Microsoft (MSFT), and Meta (META) have all revealed aggressive new commitments to advancing the technology in the first quarter earnings season. Such announcements have drawn mixed reactions from investors.
Wall Street is paying close attention to how the biggest names in tech are executing their AI strategies and wielding their balance sheets to do it. But even if the AI hype is backed with billions of dollars in new investments, shareholders are focused on where these significant increases in capital expenditures will lead.
"Given the billions of dollars that Big Tech companies have been pouring into the AI boom, investors are cautious that this may ultimately result in infrastructure overbuild minus the promised future profits," said Nicole Tanenbaum, partner and chief investment strategist at Chequers Financial Management.
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The spending sprees are historic market gambles, but they are also bold shows of strength. Executives are mobilizing vast resources. Tech companies and their shareholders are clinging to the promise of not just profitability but a pathway to dominance in the next tech era.
"The companies see a tremendous opportunity with generative AI and view it as a platform shift potentially on par with the internet or cloud," said Michael Farr, chief market strategist for Hightower Advisors and founder and CEO of Farr, Miller & Washington.
Spending mode
Amazon on Tuesday became the latest tech company to flag its swelling capital expenditures (capex).
Perhaps anticipating that many observers have moved to the "show me the money" phase of AI development, Olsavsky highlighted that generative AI revenue is already at a multibillion-dollar run rate.
That made the capital expenditures figure easier to digest. And investors largely adopted an optimistic view, lifting the stock. As analysts at UBS wrote in a note Wednesday, "higher CapEx is as clear a signal as any that there is upward bias to our AWS estimates for 2Q24 and beyond."
Alphabet wowed Wall Street in its own way. Google's parent announced a new dividend program and expanded buybacks, softening the blow of ballooning capital expenditures that hit $12 billion for the quarter — a figure that CFO Ruth Porat said will likely rise.
Microsoft also described its whopping $14 billion in capital expenditures for the last quarter as a starting point. CFO Amy Hood said the company expects capital expenditures to increase "materially," driven by cloud and AI infrastructure investments.
Microsoft CEO Satya Nadella delivers a speech during an event named Microsoft Build AI Day in Jakarta on April 30, 2024. (Photo by Adek BERRY / AFP) (Photo by ADEK BERRY/AFP via Getty Images) ·ADEK BERRY via Getty Images
"The biggest takeaway on the huge AI capex spends is that the megacaps are not content to harvest their current markets, and all have confidence in their ability to expand their revenue base," Farr said.
Coming off the tech industry's COVID-era slump and a prior year filled with drastic layoffs and cost-cutting initiatives, a sharp jump in capital expenditures can be hard to accept. The infrastructure required for AI expansion is expensive: The tech giants are each coalescing around a ballpark figure that will likely exceed $50 billion in 2024.
The ability to make substantial investments in frontier tech with largely unproven business models is its own reflection of power. Only a handful of companies can fork over tens of billions of dollars. The deep pockets of Big Tech are unrivaled. But the market is eager to see more advancements in AI, aside from flexing more computing strength, Farr said.
That's partly why the reaction on Wall Street has not always been positive. Investors clobbered Meta stock after CEO Mark Zuckerberg said it would take years for the company to reap returns for heavy AI spending.
Other factors are at play, however. Leading up to earnings, Meta's stock was on a tear, showering investors with massive appreciation. As Baird strategist Ted Mortonson noted after the report, the positioning of the stock, as compared to the middling performance of Alphabet heading into its own earnings, set Meta up for a fall.
Meta also stands apart from Big Tech's other AI players. The social media company doesn't have a cloud business to serve as a foundation to peddle new AI services.
Whereas Microsoft, Amazon, and Alphabet can make money from their AI computing infrastructure and by applying AI to their own products, Meta doesn't have an Azure, Amazon Web Services (AWS), or Google Cloud Platform (GCP) to lean on. Meta has its ad empire, of course, but Llama, its large language model, is open source, making monetization less certain.
"Less certainty is another way of stating more risk, and risk is being priced accordingly," said Farr. "Zuckerberg asked investors to trust him on it."
The other companies might have more to show for their investments and leeway to spend. But no AI play this early in the game is assured.
Hamza Shaban is a reporter for Yahoo Finance covering markets and the economy. Follow Hamza on Twitter @hshaban.
