Investors increasingly worry about major US tech giants’ substantial spending on artificial intelligence. A recent Goldman Sachs report highlights these concerns, especially regarding profitability.
Massive capital expenditures in AI
According to Goldman Sachs, hyperscale tech companies have spent nearly $357 billion over the past year on capital expenditures and research and development, particularly in AI. These firms include Meta Platforms Inc., Alphabet Inc., Amazon.com Inc., and Microsoft Corp.
Much of this spending is directed towards AI, almost a quarter of the S&P 500’s total for R&D and capital expenditures. Goldman Sachs analysts are skeptical about the timeframe for these investments to yield returns, suggesting it may take longer than anticipated.
Jim Cavello, global head of equity at Goldman Sachs, doubts the global expectations from the AI revolution. He questions the scale of its influence and profitability compared to past technological advancements like the internet, cell phones, and laptops.
Cavello predicts that big tech’s AI expenditures will reach $1 trillion in the coming years. He also challenges the notion that the massive costs of powering AI products will decrease soon, noting that other chip makers have yet to challenge Nvidia’s dominance significantly. This contradicts the idea that increased competition would reduce hardware prices for AI.
The pressure to prove profitability
Researchers at Barclays have noted that US tech firms’ heavy data center spending appears to be driven by a fear of missing out. They highlight the gap between the expected investments in AI infrastructure and the projected revenue. Wall Street anticipates cloud service providers will spend around $60 billion annually on AI-related infrastructure but only generate $20 billion in additional revenue by 2026.
Goldman Sachs strategist Ryan Hammond asserts that hyper scalers must demonstrate revenue generation and profitability from these investments. If early signs indicate these investments might not be profitable, it could lead to a “valuation de-rating.” Facebook-owner Meta and Google-parent Alphabet are expected to spend record amounts on AI this year.
Amazon plans to pay $63 billion in 2024, up from $53 billion last year. While Nvidia remains the biggest beneficiary of the AI trade, the AI boom has also propelled some other US stocks to record highs. Investors expect the AI rush to continue for the rest of 2024, boosting the rally. However, some analysts are optimistic about infrastructure and utility providers leading the market in the second half 2024.
Comparisons to past tech spending
Goldman Sachs strategists note that current AI spending is still below the capex levels seen during the dot-com crash. However, the Barclays team argues that big firms are overspending on infrastructure. They believe investments in data centers will exceed expected demand, as existing projects should be sufficient to power the internet. Hammond suggests that sales revisions will be crucial in assessing the profitability of AI investments.
While big tech’s AI spending is expected to reach unprecedented levels, the pressure is on these companies to prove that their investments will yield significant returns. Investors and analysts remain cautious, closely watching how these expenditures will impact the profitability and valuation of these tech giants.