The message from Big Tech leaders 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) all revealed aggressive new commitments aimed at advancing technology during 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 execute their AI strategies and use their balance sheets to do so. But even as the hype around AI is backed by billions of dollars in new investments, shareholders are focused on the consequences of these significant increases in capital spending.
“Given the billions of dollars that big tech companies have invested in the AI boom, investors are wary that it could ultimately lead to overbuilding infrastructure without the promised future profits,” said Nicole Tanenbaum, partner and Chief Investment Strategist at Checkers Financial Management.
Spending sprees are historic bets on the market, but they are also bold shows of force. Leaders mobilize enormous resources. Tech companies and their shareholders are clinging to the promise not only of profitability, but also of a path to dominance in the next technological era.
“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 at Hightower Advisors and founder and CEO of Farr, Miller & Washington.
Spending method
Amazon on Tuesday became the latest technology company to report increasing its capital expenditures (capex).
Chief Financial Officer Brian Olsavsky said overall capital spending is expected to rise “significantly” this year, compared to 2023’s figure of $48.5 billion, due to rising infrastructure costs to support the growth of AWS, including generative AI.
Perhaps anticipating that many observers are moving toward the “show me the money” phase of AI development, Olsavsky pointed out that revenues generated by generative AI are already reaching a multibillion-dollar rate.
This made the capital expenditure figure easier to digest. And investors largely took an optimistic view, lifting the stock. As UBS analysts wrote in a note Wednesday, “higher capital spending is as clear a signal as any that there is an upward bias in our AWS estimates for 2Q24 and beyond.”
Alphabet has seduced Wall Street in its own way. Google’s parent company announced a new dividend program and expanded buybacks, softening the blow from capital spending that reached $12 billion for the quarter – a figure that Chief Financial Officer Ruth Porat said will likely increase.
Microsoft also outlined its whopping $14 billion in investments for the last quarter as a starting point. Chief Financial Officer Amy Hood said the company expects capital spending to increase “significantly,” driven by investments in cloud and AI infrastructure.
