trillion-dollar investment wave into AI infrastructure raises concerns

As financial reports unveil, industry heavyweights Amazon, Alphabet, Microsoft, and Meta are pouring significant resources into AI infrastructure.

However, doubts loom large regarding the payoff from these hefty investments. According to Michael Farr, Chief Market Strategist at investment advisory firm Hightower Advisors, tech firms are equating the vast commercial potential of generative AI with that of networks and cloud services as per a report by Yahoo Financesignaling a seismic shift in industry perception.

Raining green on AI

In Microsoft’s third quarter of fiscal year 2024 (3QFY24, ending March 31, 2024), capital expenditures surged by 79% to US$14 billion, driven by ongoing expansion in cloud and AI infrastructure. Amy Hood, Microsoft’s CFO, anticipates a “materially” significant increase in the current quarter (4QFY24) due to these expansions.

Amazon’s CFO, Brian Olsavsky, forecasts a “meaningful” increase in overall capital expenditures for 2024, surpassing the US$48.5 billion spent in 2023, primarily due to rising infrastructure costs supporting AWS. Olsavsky highlights that revenue from genAI has already reached the trillion-dollar mark, easing concerns over capital expenditure absorption.

Alphabet reported a 91% year-on-year increase in capital expenditures to US$12 billion in the first quarter of 2024, exceeding market expectations of US$9.9 billion. Ruth Porat, Alphabet’s CFO, expects further capital expenditure growth in 2024 to sustain AI product development.

Meta has also raised its 2024 capital expenditure outlook to US$35 billion to US$40 billion, representing a 28% to 47% increase year-on-year.

Deep pockets for AI splurging

Investing heavily in emerging technologies such as AI serves as a showcase of strength, but they are normally reserved for those companies that could afford investments of hundreds of billions of dollars. Nicole Tanenbaum, Partner and Investment Strategist at Checkers Financial Management notes that investors are cautiously evaluating the multibillion-dollar investments by tech giants in the AI ​​field, fearing potential overbuilding of infrastructure could jeopardize profitability.

In addition, while Microsoft, Amazon, and Google offer their cloud service platforms, Meta lacks proprietary cloud services despite substantial advertising revenue. Meta’s open-source, free-of-charge Large Language Model (LLM) called Llama raises market concerns about its ability to absorb massive capital expenditures.