The extensive capital expenditures could threaten the fat margins at these companies, and the pressure on this metric is likely to deter investors.
Major tech stocks fell in after-hours trading on Wednesday, underscoring the challenges companies face as they try to balance ambitious AI activities with the need to reassure investors they are focused on short-term results.
Shares of Meta fell 2.9% in after-hours trading, and Microsoft’s share price fell 3.6%, despite both beating profit and revenue expectations for the July-September period. Amazon shares also fell.
“It’s expensive to use AI technology. Acquiring capacity is expensive,” said GlobalData analyst Beatriz Valle.
“It has become a competitive race among the big tech companies to build capacity. It will take time to see the results, to see widespread adoption of the technology.”
According to Visible Alpha, Microsoft’s capital expenditure for one quarter is now higher than its annual expenditure through fiscal year 2020. For Meta, a quarter of its expenditure is equivalent to what they spent in a year through 2017.
Microsoft said capital spending rose 5.3% to $20 billion in the first fiscal quarter, and forecast higher spending on AI in the second quarter.
But growth at its core cloud business Azure is likely to slow, the company warned, blaming capacity constraints in its data centers.
“I think what investors are missing is that for every year that Microsoft overinvests – as they have done this year – they are squeezing margins by a full percentage point over the next six years,” said Gil Luria, head of technology research at DA. Davidson.
Bottlenecks hinder growth
Capacity constraints are rippling through the technology industry.
Despite the concerns, Meta and Microsoft said it was still very early in the AI cycle and emphasized AI’s long-term potential.
The investments are reminiscent of the days when Big Tech developed cloud companies and waited for customers to embrace the technology.
“Building out the infrastructure may not be what investors want to hear in the near term, but I think the opportunity here is very good,” Meta CEO Mark Zuckerberg said on Wednesday’s earnings call. “We continue to invest heavily in this.”
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Reporting by Anna Tong in San Francisco, and Aditya Soni and Deborah Sophia in Bengaluru; Editing by Sayantani Ghosh and Sonali Paul
Our Standards: Thomson Reuters Trust Principles.
