Big technology companies are significantly increasing their investments in artificial intelligence infrastructure, but shareholders are expressing concerns about the immediate financial returns.
On October 31, reports indicated that companies like Microsoft, Meta, and Amazon are massively increasing capital expenditures to build out AI data centers. According to the reports, Wall Street is eager to see a quicker return on these billions of dollars of investments.
Both Microsoft and Meta acknowledged capital expenses were growing because of their AI investments. Alphabet also mentioned increased expenditures, and Amazon stated its spending would rise through the end of the year and into 2025. However, this substantial spending could negatively affect the companies’ profit margins, potentially worrying investors.
Big Tech stocks fell on Thursday, reflecting the challenges these companies face while trying to pursue their AI objectives. The companies also need to reassure investors that their focus is not only on long-term success but also short-term results. Meta shares decreased by 4%, and Microsoft dropped 6%. Amazon’s shares fell by 3.4%, but investors pushed them higher after the market closed, following better-than-expected third-quarter results.
“It’s costly to run AI technology. Getting capacity is expensive,” stated GlobalData analyst Beatriz Valle. “It has become a competitive race among the big tech companies to build out capacity. It’s going to take time to see the returns, to see widespread adoption of the technology.”
Amazon announced plans for higher capital expenditures in the near future to support the development of AI software. CEO Andy Jassy described AI as a “maybe once-in-a-lifetime type of opportunity.” The company’s capital expenditure is expected to be around $75 billion this year, compared to $48.4 billion last year. The number will rise again in 2025.
According to Visible Alpha, Microsoft’s capital spending for a single quarter now exceeds its total annual expenditure before the fiscal year 2020. For Meta, a quarter’s worth of spending is equivalent to its yearly spending until 2017. Microsoft reported a 5.3% increase in capital spending, reaching $20 billion in its first fiscal quarter, and predicted increased AI spending in the second quarter. However, Microsoft warned that the growth of its cloud business, Azure, may slow down because of capacity constraints at its data centers.
“I think what investors are missing is that for every year Microsoft overinvests – like they have this year – they’re creating a whole percentage point of drag on margins for the next six years,” said Gil Luria, head of technology research at D.A. Davidson.
Meta also warned of a “significant acceleration” in artificial intelligence-related infrastructure expenses next year.
Capacity constraints are a major issue in the tech industry. Chipmakers like Nvidia are struggling to meet the demand of hyperscalers such as Microsoft and Google. Advanced Micro Devices (AMD) reported that demand for AI chips was growing faster than supply, limiting its ability to capitalize on order surges. The company also warned of tight AI chip supplies going into the next year. Despite concerns, both Meta and Microsoft emphasized the long-term potential of AI, stating that it’s still early in the AI cycle.
The investments are reminiscent of when Big Tech was developing cloud businesses and waiting for customers to embrace the technology. Meta CEO Mark Zuckerberg, during the recent earnings call, said, “Building out the infrastructure is maybe not what investors want to hear in the near term, but I think the opportunities here are really big. We’re going to continue investing significantly in this.”
