Big Tech’s Soaring AI Spending Raises Investor Concerns Ahead of Amazon's Earnings Report

As Meta and Microsoft ramp up AI investments to fuel growing demand, Wall Street is expressing concern over the impact on Big Tech’s profit margins. After reporting increased AI spending, Microsoft’s shares dropped 3.6% and Meta’s by 2.9% in after-hours trading, with Amazon’s earnings next.

Rising AI Costs Pressure Big Tech Margins as Microsoft, Meta Shares Fall Despite Strong Earnings

Major technology companies, such as Microsoft and Meta, are increasing their expenditures on AI data centers to satisfy the substantial demand. However, Wall Street is eager to receive a speedier return on the billions invested.

On October 30, Microsoft and Meta disclosed that their AI investments increased their capital expenses. Alphabet also disclosed that these expenditures would persist.

Amazon, scheduled to disclose its earnings on October 31, is anticipated to replicate these projections.

Extensive capital expenditures may jeopardize these companies' fat margins, and investors are likely to be alarmed by the pressure of this metric.

On October 30, after-hours trading saw a decline in the value of shares of major technology companies, underscoring the obstacles they encounter as they endeavor to reconcile their commitment to short-term results with their ambitious AI initiatives.

In after-hours trading, Microsoft's stock price declined 3.6%, while Meta's stock price declined 2.9%, even though both companies exceeded revenue and profit projections for September. Amazon's stock price also fell.

"It's costly to run AI technology. Getting capacity is expensive," said 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."

Microsoft, Meta’s Quarterly AI Spend Outpaces Past Annual Budgets, Raising Margin Concerns

According to Visible Alpha (via Reuters), Microsoft's capital expenditures for a single quarter are currently more significant than their annual expenditures until fiscal 2020. Meta's expenditures during a quarter are comparable to those of a year before 2017.

In the first fiscal quarter, Microsoft reported a 5.3% increase in capital expenditure to $20 billion and anticipates a rise in AI spending in the second.

However, it cautioned that Azure, its primary cloud operation, is expected to experience a decline in growth, attributing this to 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, in contrast, issued a cautionary note regarding the "substantial acceleration" of infrastructure expenses associated with artificial intelligence in the upcoming year.

Chip Shortages Challenge Big Tech’s AI Expansion, But Meta and Microsoft See Long-Term Gains Ahead

Capacity constraints are causing ripple effects throughout the technology sector.

It is becoming increasingly more work for cloud companies to expand their capacity as chipmakers, such as industry leader Nvidia, cannot maintain pace.

Advanced Micro Devices, which disclosed its results earlier this week, stated that the demand for AI processors was increasing at a rate that exceeded the supply, restricting its capacity to capitalize on the order surge. It cautioned that the supply of AI processors would be limited in the upcoming year.

Meta and Microsoft, despite the apprehensions, emphasized the long-term potential of AI and stated that it was still very early in the AI cycle.

The investments evoke the era when Big Tech was developing cloud businesses and awaiting customers' adoption of the technology.

"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," said Meta CEO Mark Zuckerberg during Wednesday's earnings call. "We're going to continue investing significantly in this."