Big tech companies including Microsoft and Meta are increasing spending to build AI data centers to meet growing demand, but Wall Street wants the billions invested to pay off more quickly.
Microsoft and Meta both said Wednesday that their capital spending was increasing due to their investments in AI. Alphabet also indicated on Tuesday that these expenses would remain high.
Amazon, which is due to publish its results on Thursday, should echo these forecasts.
High capital spending could threaten these companies’ margins, and pressure on this metric is likely to scare off investors.
Shares of major technology companies fell after Wednesday’s session, underscoring the challenges companies face as they try to balance ambitious artificial intelligence goals with the need to reassure investors that that they focus on short-term results.
Meta’s stock fell 2.9% after the session and Microsoft’s fell 3.6%, although both beat earnings and revenue forecasts for the July-September period. Amazon’s stock also fell.
“Operating AI technology is expensive. Getting capacity is expensive,” said Beatriz Valle, an analyst at GlobalData.
“It has become a competitive race among large technology companies to develop capabilities. It will take time to see benefits and widespread adoption of the technology.”
According to Visible Alpha, Microsoft’s capital spending for a single quarter is now higher than its annual spending through fiscal 2020. For Meta, a quarter of spending is what it was spending in a year through fiscal 2020. 2017.
Microsoft said capital spending rose 5.3% to $20 billion in its fiscal first quarter, and predicted an increase in AI spending in the second quarter.
But growth in its main cloud business, Azure, is likely to slow, it warned, blaming capacity constraints in its data centers.
“I think what investors don’t see is that for every year that Microsoft overinvests – like this year – they create a percentage point drag on margins for the next six years,” said Gil Luria, head of technology research at DA Davidson.
Meta, meanwhile, warned of a “significant acceleration” in AI-related infrastructure spending next year.
BOTTLENECKS HINDER GROWTH
Capacity constraints are impacting the technology industry.
Chipmakers, including giant Nvidia, are struggling to keep pace, making it harder for cloud computing companies.
Advanced Micro Devices, which reported earnings earlier this week, said demand for AI chips was growing much faster than supply, limiting its ability to exploit the surge in orders. The company warned that the supply of artificial intelligence chips would be limited until next year.
Despite these concerns, Meta and Microsoft said it was still very early in the AI cycle and highlighted AI’s long-term potential.
These investments hark back to the days when big tech companies built businesses in the cloud and waited for customers to adopt the technology.
“Building the infrastructure may not be what investors want to hear in the short term, but I think the opportunities are really big,” Meta CEO Mark Zuckerberg said during the earnings conference call. from Wednesday. “We will continue to invest significantly in this area.