Major technology companies including Microsoft (MSFT, Financial), Meta (META), Google parent Alphabet (GOOGL), and Amazon (AMZN) are set to make record capital expenditures exceeding $200 billion this year, with plans to increase those investments next year. These tech giants aim to convince Wall Street that their substantial investments in artificial intelligence (AI) will eventually become more profitable than their current businesses, which include digital advertising, goods, and software sales.
Third-quarter financial reports revealed that despite returns not yet justifying the massive investments, these companies remain committed to betting heavily on AI, with plans to further expand spending next year. Bloomberg reported that capital spending by these leading internet and software companies will surpass previous records, and executives have warned investors of continued significant investments in the coming year.
The Silicon Valley powerhouses are investing heavily in AI to secure scarce high-end chips and build large data centers essential for AI technology. These resources are vital as the global AI boom demands substantial costs and resources. The companies are also striving to assure Wall Street that these massive investments will yield better returns than their existing operations.
During an earnings call, Meta CEO Mark Zuckerberg expressed commitment to investing in AI language models, aiming to make them core to future operations. He highlighted new opportunities to accelerate core businesses with AI advancements, expecting high returns on investment in coming years. Similarly, Amazon CEO Andy Jass described AI as a "once-in-a-lifetime opportunity," confident that their efforts will lead to significant revenue growth and free cash flow over time.
Despite substantial AI-related expenditures, stock performances varied among these giants. Alphabet and Amazon stocks rose after their earnings reports, with Alphabet gaining nearly 3% and Amazon over 6%. However, Microsoft and Meta saw decreases of over 6% and 4%, respectively. Analysts attributed this to strong cloud computing growth benefiting Alphabet and Amazon, while Microsoft's cloud growth outlook was less promising, and Meta's spending plans caused market unease.
Microsoft's Azure cloud business showed slowed revenue growth in Q3, expected to slow further in Q4, primarily due to the company’s inability to launch new AI servers as quickly as anticipated, rather than a lack of customer demand. Analysts are optimistic about Microsoft's long-term prospects, considering its significant investments, particularly its stake in OpenAI.
Meta's spending remains a concern for Wall Street, as investors await returns on its substantial AI bets. CEO Mark Zuckerberg stated that AI investments are improving Facebook and Instagram's ad sales, despite Reality Labs incurring significant losses. Some analysts believe that patience will eventually be rewarded as these investments start paying off.
Unlike its peers, Apple (AAPL) has been less affected by recent AI product launches, with its Q3 performance showing minimal impact due to its AI system, Apple Intelligence.
Overall, tech giants have shown some positive growth in conversational AI services, but returns have not yet met expectations, and growth is still limited by expenditures in other areas. Shareholders may need to wait longer to see definitive returns on these AI investments.
