- Investors express anxiety over potential impacts on profitability due to heightened capital spending.
- Big technology companies need to navigate the delicate balance between long-term investment and short-term financial expectations.
Major technology companies such as Microsoft, Meta, and Amazon, in recent months, have dramatically increased their capital expenditures to build out artificial intelligence (AI) data centres.
The strategic push aims to meet the growing demand for AI capabilities, reflecting the industry’s recognition of AI as a transformative technological force.
However, Wall Street’s appetite for immediate financial returns poses a significant challenge to these companies, as investors express anxiety over potential impacts on profitability due to heightened capital spending.
Microsoft and Meta both reported rising capital expenses driven by their AI initiatives, with Microsoft’s spending for a single quarter exceeding its annual expenditure prior to fiscal year 2020.
Long-term commitment
Meanwhile, Meta anticipates a significant increase in infrastructure costs associated with AI in the upcoming year. Amazon, adopting a similar trajectory, plans for capital expenditures around $75 billion in 2024, a notable increase from $48.4 billion in the previous year, indicating a long-term commitment to AI development.
Despite exceeding profit and revenue expectations for the third quarter, shares of these companies experienced declines, with Meta’s stock slipping by 4 per cent and Microsoft’s by 6 per cent.
The market reaction underscores the dual pressures these firms face: the urgent need to invest in AI infrastructure while simultaneously assuring investors of their focus on short-term profitability.
An industry expert said that the costs associated with AI technology and infrastructure are substantial, and while the race to build out capacity intensifies, the returns on these investments are unlikely to materialise swiftly.
Potential slowdowns
As these limitations persist, companies like Microsoft warn of potential slowdowns in growth for their Azure cloud business, attributing this to capacity constraints in their data centres.
The situation is compounded by industry-wide bottlenecks. Key players in the chip manufacturing sector, such as Nvidia and Advanced Micro Devices (AMD), have reported challenges in meeting the soaring demand for AI chips, which further constrains the capacity expansion efforts of cloud service providers.
Despite the concerns, Meta and Microsoft said it was still very early in the AI cycle and emphasised the long-term potential of the technology.
The investments are reminiscent of when Big Tech was developing cloud businesses and waiting for customers to embrace 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 earning call.
“We’re going to continue investing significantly in this.”