Major tech companies like Microsoft and Meta are increasing their spending to build AI data centers quickly to meet high demand. However, Wall Street is eager for a faster return on the billions they are investing.
Both Microsoft and Meta reported on Wednesday that their capital expenses are rising due to AI investments. Alphabet also stated on Tuesday that its spending would remain high.
Amazon, which is set to release its results on Thursday, is likely to follow this trend.
This significant capital spending could hurt the profit margins of these companies, and any pressure on these margins may alarm investors.
Shares of big tech fell in after-hours trading on Wednesday, highlighting the challenges these companies face in balancing ambitious AI projects with the need to assure investors of short-term results.
Meta’s stock dropped 2.9% in after-hours trading, while Microsoft’s shares fell 3.6%, even though both companies exceeded profit and revenue expectations for the July-September quarter. Amazon’s stock also declined.
“Running AI technology is expensive. Getting the capacity is costly,” said GlobalData analyst Beatriz Valle.
“There’s a competitive race among major tech firms to build capacity. It will take time to see returns and widespread use of the technology.”
Microsoft’s capital spending for one quarter now exceeds its total annual spending until fiscal 2020, according to Visible Alpha. For Meta, quarterly spending matches what it spent in a year until 2017.
Microsoft reported a 5.3% increase in capital spending to $20 billion in its first fiscal quarter and expects higher AI spending in the second quarter.
However, the growth of its key cloud business, Azure, is expected to slow due to capacity limits at its data centers.
“I think investors are missing that every year Microsoft overinvests, like this year, creates a one percentage point 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 AI-related infrastructure costs next year.
Bottlenecks Slowing Growth
Capacity limitations are affecting the tech industry as a whole.
Chipmakers like Nvidia are struggling to keep up with demand, which is making it harder for cloud companies to expand.
Advanced Micro Devices (AMD), which reported results earlier this week, stated that demand for AI chips is rising much faster than supply, limiting its ability to fulfill orders. AMD warned that the supply of AI chips would be tight going into next year.
Despite these concerns, Meta and Microsoft stated that the AI cycle is still in its early stages and highlighted AI’s long-term potential.
These investments remind us of when Big Tech was developing cloud services and waiting for customers to adopt the technology.
“Building the infrastructure may not be what investors want to hear right now, but I believe the opportunities here are significant,” said Meta CEO Mark Zuckerberg during Wednesday’s earnings call. “We will continue to invest heavily in this area.”
