The technology represents an enormous opportunity — and that opportunity continues to grow, said Daniel Morgan, a senior portfolio manager at Synovus Trust. “But unfortunately, so does the upfront investment.” Investors are left to wonder, he said: “Can these hyper-scalers capture enough incremental increase in profit growth from their investments?”
A winning product would also do the trick, he added.
Cloud Growth
It wasn’t all bad. The three tech titans reported a healthy pace of growth in their cloud-computing divisions, the most obvious business to benefit from generative AI as the technology requires copious amounts of computational resources to perform. Those gains weren’t enough though to appease investors who are growing increasingly impatient to see returns from quarter after quarter of heavy spending on data centers and other AI infrastructure.
Amazon projected third-quarter operating income that fell shy of analysts’ estimates on Thursday. Chief Executive Officer Andy Jassy has been waging a cost-cutting campaign to free up resources to invest in AI.
“It’s really a positive indicator when we step up capital expenditures,” Amazon Chief Financial Officer Brian Olsavsky said while working to assure investors and analysts on a call Thursday.
The company’s capital expenditures totaled $30.5 billion, mostly in its AWS cloud unit, in the first half of the year. Jassy said the company has developed sophisticated algorithms to guide its investment decisions so that it builds enough capacity to meet demand without denting profits. He’s vowed the investments will be worth it to support what he and his team have called a multibillion-dollar revenue run rate business.
Alphabet’s outlook for the AI growth that investors should expect was short on specifics. Chief Investment Officer Ruth Porat said on a call with analysts that the company had “seen the benefit of our strength in AI, AI infrastructure, as well as generative AI solutions for cloud customers,” without detailing how much of the cloud unit’s growth could be attributed to investment in the technology.
Wall Street’s concerns about capital expenditures, which totaled $13.2 billion in the quarter, overshadowed better-than-expected sales. Shares fell 5% the day after the results.
Microsoft also disappointed. Sales growth for Azure, the company’s cloud computing service, slowed from the previous period. Microsoft said AI drove 8 percentage points of Azure’s growth in the quarter, compared with 7 percentage points in the previous period.
Analysts pressed Microsoft executives during a call to explain whether the sales growth would justify such heavy spending. CEO Satya Nadella stressed the investments were driven by customer demand.
One company that has bucked trend is Facebook parent Meta Platforms Inc. The company unexpectedly raised its forecast for capital expenditures, citing AI investments, but it’s second-quarter revenue also beat expectations. CEO Mark Zuckerberg credited spending on AI with driving improvements in ad targeting and content recommendations.
Zuckerberg has framed Meta’s sky-high spending on AI as a short-term sacrifice for long-term gain.
On Thursday, Apple Inc. similarly said new AI features will spur iPhone upgrades in the coming months, helping the company reemerge from a sales slowdown that has hit its China business especially hard.
Chipmakers Slide
The spending backlash also raised fears for the tech companies that have arguably benefited most from the push into AI: chipmakers. Nvidia Corp.’s shares tumbled 6.7% on Thursday and extended declines on Friday. SK Hynix Inc., the leading supplier of AI memory chips, tumbled 10% in Seoul trading, part of a broader decline in semiconductor-related stocks in Asia that also included Taiwan Semiconductor Manufacturing Corp. and Samsung Electronics Co.
The companies that produce chip-making equipment, including ASML Holding NV and Tokyo Electron Ltd., similarly fell.
Intel Corp. was headed for its worst share decline in more than 40 years after losing market share to AI leaders such as Nvidia. The shares were down 28.1% on Friday after the chipmaker reported a grim sales outlook and laid out plans to slash jobs.
To justify what could amount to a total of $1 trillion of investment in AI infrastructure over the next several years, companies need to show the technology is capable of solving increasingly complicated tasks. It must go beyond the incremental improvements that tools have delivered to professions such as coding and advertising, Jim Covello, the head of equity research at Goldman Sachs Group Inc., said in July.
Covello, who has emerged as a leader of a small but growing cohort casting doubt on the AI rally, has predicted that the tide will turn against the AI rally in the next year and a half if more significant use cases for the technology don’t start emerging.
In a mid-July interview, Zuckerberg worked to justify his industry’s spending and encouraged the market to look to the future.
“I actually think all the companies that are investing are making a rational decision,” he said at the time. “The downside of being behind is that you’re out of position for, like, the most important technology for the next 10 to 15 years.”
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