As big tech giants are spending hundreds of billions of dollars on artificial intelligence (AI), investors are still concerned about whether this massive investment will pay off.
This comes as quarterly results of major tech giants like Alphabet’s Google, Microsoft, Meta and Amazon are due on Wednesday.
Huge investment in AI:
Experts believe the results will show whether excessive spending on AI has driven enough growth in cloud computing and advertising to justify the cost.
The four companies are on track to pour nearly $600 billion into AI this year, a historic outlay that has strained cash flow and tested Wall Street’s patience, even as their stocks remain largely underpinned by future profit expectations.
Funding that race has consequences. Amazon and Instagram-parent Meta have announced job cuts affecting thousands of employees, while Microsoft has come up with its first employee buyout program in more than five decades.
“What investors are looking for — including us — is what is the return on all capital expenditures (capex),” said Joe Maginot, large-cap portfolio manager at Madison Investments, which holds shares in Alphabet, Meta and Amazon.
“Obviously, it takes time, but … these are businesses that have generated significant amounts of free cash flow, and today, almost all of that operating cash flow is being consumed in capital expenditures. So, the economics of the business are changing.”
That change will be examined in the cloud results.
Growth across sectors is expected to accelerate modestly in the January-to-March quarter: Amazon Web Services is expected to grow 25%, Microsoft Azure is expected to grow 40% and Google Cloud is expected to grow 50.1%, compared with growth of 23.6%, 39% and 47.8%, respectively, in the previous quarter, according to data from Visible Alpha and LSEG.
Cloud companies see revenue boost as AI spending increases:
Overall revenue growth remains strong as Alphabet’s sales are expected to increase 18.7% to $107.06 billion, while Amazon’s sales are expected to increase 13.9% to $177.30 billion and Microsoft’s sales are expected to increase 16.2% to $81.39 billion.
Meta’s sales are expected to rise 31% to $55.45 billion, its fastest growth in more than four years, as its AI bets improve ad targeting and reach and the social media giant benefits from its strong position in the digital market.
Microsoft faces tough scrutiny:
The stakes are especially high for Microsoft as its stock has lagged rivals and ended the January-March period with its worst quarterly performance since the 2008 financial crisis, while other Big Tech companies posted gains.
Chart shows the share price performance of Microsoft, Meta, Alphabet and Amazon
Once seen as an early leader of the AI race, investors fear that Microsoft has failed to convert its vast customer base of business customers into paying Copilot users.
Only 3.3% of its more than 450 million enterprise customers subscribe to the $30 per month AI assistant.
At the same time, AI tools from Microsoft’s partners like Anthropic are threatening to displace the traditional software that has long been the company’s cash cow. Microsoft is attempting to turn that threat into an advantage by weaving rival AI models deeper into its ecosystem.
Microsoft’s historic collaboration with OpenAI, which helped drive billions of dollars in cloud demand from customers wanting access to ChatGPAT, has also lost its exclusivity.
While the Satya Nadella-led company will get a guaranteed 20% cut of OpenAI’s revenue by 2030 under a new agreement, OpenAI is now free to work with competing cloud providers like Amazon.
“Companies need to talk about why their business model is not being meaningfully disrupted in AI and why their investment with OpenAI, their relationship with OpenAI is enabling them to remain competitive,” said Melissa Otto, head of research at S&P Global Visible Alpha.
“Nadella needs to address this.”
