Tech giants keep faith in AI as cash piles burn
Tech stocks have lost more than a trillion dollars in market value this week in a brutal sell-off ignited by renewed fears about the sustainability of the artificial intelligence boom.
Investors dumped some of the world’s largest companies after their latest results showed they were ploughing ever-larger sums into building AI infrastructure but also suffering problems in their core businesses.
The sell-off came in the same week that Anthropic released the prospectus for its hotly anticipated initial public offering. The listing, which is expected next month, is forecast to be one of the largest in history. It will act as a litmus test for an investment boom that has attracted increasing scepticism.
Anthropic’s prospectus claimed that AI could “bring forth an age of miracles”.
But as it tried to attract investors with the potential of AI, other tech companies revealed the cost of trying to deliver those lofty goals.
Alphabet, Amazon, Meta and Microsoft said their capital spending hit a combined $207.4bn in the last quarter, nearly double last year’s total.
Google, Meta and Amazon, historically cash-generating machines, burnt through $45.2bn between them. Microsoft’s cashflow remained in positive territory.
Alphabet, the owner of Google, suffered its largest one-day drop in market value on Thursday after it reported problems monetising its AI search features. The company makes about half its revenue through advertising, but sales undershot Wall Street’s expectations even though the company recorded a five-year high in the number of search queries. Investors fear that Google’s AI mode could be cannibalising its search business.
Analysts at JP Morgan warned: “AI mode is becoming a bigger percentage of search queries and we believe it lags traditional search in both coverage and ad load, resulting in lower overall monetisation.”
Alphabet’s capital spending during the quarter hit $51.4bn, pushing its free cash flow into negative territory for only the second quarter since it went public in 2004. It expects capital expenditure to be about $200bn this year.
Shares in Amazon fell 1.4 per cent yesterday after it reported weaker than expected revenue in its core online shopping business, alongside increasingly vast capital spending commitments.
The company is spending more than any of the other hyperscalers on building data centres. It expects capital expenditure to hit $220bn this year.
Amazon’s free cash flow fell deeper into negative territory in the quarter, dropping to $42.4bn.
Both Amazon and Alphabet pointed to the growth in their cloud businesses as a sign that demand for AI computing capacity was rapidly increasing, which would justify their spending. Amazon Web Services reported 48 per cent year-on-year growth, while Google Cloud, which is significantly smaller than AWS, increased 103 per cent.
However, investors were not convinced. Michael Hewson, chief analyst at MCH Market Insights, said: “The market is trying to wrestle with the equation about a huge amount [of capital expenditure] that’s being spent relative to the timeline of a return on investment. And at the moment, they don’t have an answer to that.”
There were other signs of weakness in the sector. Intel, the chipmaker, lost more than a quarter of its market capitalisation yesterday after the company lowered its guidance for the final quarter because of weakness in the personal computer market.
PC demand has softened this year as manufacturers have had to raise prices to offset severe shortages of critical components, such as memory chips. US hyperscalers have cornered the world’s chip market for AI data centres. Lip-Bu Tan, Intel’s chief executive, said: “The industry continues to navigate one of the most significant supply shortages in history, driven by the unprecedented demand for super intelligence.”
While much smaller than the hyperscalers, Intel’s capital spending is also growing fast. It is expected to hit $20bn this year, and will be “substantially higher” next year, as the company attempts to expand its semiconductor manufacturing capacity in the US.
Like Alphabet, Intel faces the prospect of trying to invest in future AI opportunities, while navigating the immediate disruption the technology is causing to its existing business lines.
Reddit was also hit by the disruption.
Its shares fell 29 per cent yesterday after it warned that Google’s growing use of AI in search was hurting referral traffic and could shrink its user base.
Dan Ives, a tech analyst and senior managing director at Yorkville Ives, said: “The disruption caused by AI is on full display during tech earnings season as is the uncertainty around which names and sectors will be the disruptors vs the disrupted.”
Despite these mounting concerns, there was no sign of the investment boom slowing down. Anat Ashkenazi, chief financial officer at Alphabet, said the company’s capital expenditure would “increase significantly in 2027”.
Andy Jassy, Amazon’s chief executive, said its capital spending would be “meaningfully more” next year. He acknowledged that it “would be more convenient” to spread the company’s capital expenditure over 25 years but said: “That’s not the world we live in.”
With cash flow turning negative, the hyperscalers will increasingly have to find alternative sources of capital. Theyhave already borrowed extensively from the bond markets, having issued about $223bn in bonds this year, according to CPRAM, $117bn more than last year. Goldman Sachs analysts warned that credit markets had been suffering from “AI-related supply indigestion” over the last few weeks.
Meta, which reported negative cash flow for the first time in more than a decade last quarter, launched a $95bn equity raise on Monday, one of the largest in history. On the same day SpaceX closed a $40bn debt financing deal with the investment firm Apollo to secure access to graphics processing units, the largest ever GPU financing deal.
The tech giants have justified the scale of spending by pointing to the supply constraints on AI computing capacity. They argue that demand will outpace supply for the foreseeable future, giving pricing power to those who control the supply.
Jassy said AWS’s capacity was “largely sold out” next year, with a “good chunk” sold in 2028 too. He argued that AWS could grow 40 per cent in each of the next two years, and reach $1trn in revenue within a decade.
Sundar Pichai, Alphabet’s chief executive, agreed. “There’s huge demand.
We are working hard to bring more capacity online to meet this long-term demand,” he said.
Others are less convinced. Dario Perkins, managing director for global macro at TS Lombard, acknowledged that demand for computing power was “off the scale”, but said that did not necessarily mean the AI boom was sustainable.
“The question is whether those revenues are coming from businesses and end-users outside the ecosystem — presumably to pay for productivity-enhancing tools — or from simple capex recycling,” he said.
Perkins estimated that nearly 80 per cent of revenue in the AI ecosystem was a result of so-called circular financing.
“That is not a mark of genuine sustainability,” he said.
Torsten Slok, chief economist at Apollo, argued that few companies outside the Magnificent Seven (Mag 7) tech stocks — Amazon, Alphabet, Apple, Microsoft, Meta, Nvidia and Tesla — had seen any real impact from AI.
“AI has delivered zero financial payoff to corporate America outside of tech. Revenue per worker is rising for the Mag 7 but is flat for the S&P 493 … The AI story will be decided in the S&P 493, not the Mag 7, and so far, there is no evidence that revenue growth or margins are improving,” he said.
This may yet change. AI adoption is still in its early stages. But whether it will change fast enough to justify the capital going into AI is another question.
Comments
Post a Comment