AI: Another Quarter, another $100 billion+ in AI capex. RTZ # 438

...when 'patience may not be a virtue' as AI Scales

The Bigger Picture, Sunday, August 4, 2024

The big tech companies keep reminding investors that ‘Patience is a virtue’ when it comes to fast-growing AI investments. In this week’s AI: the Bigger Picture’, I’d like to discuss how the big tech companies (aka ‘Magnificent 7’) et al, are committed to remain on their unprecedented ‘AI Scaling’ capex roadmaps in this AI Tech Wave.

This despite the rising questions both in the private and public markets, on the timing of commensurate revenues and profitability around AI products and services. And of course, WHAT those applications and services are likely to be. I’ve of course addressed these issues in earlier posts, but think it’s useful to take a look at where we are after this quarterly earnings season. Let me unpack.

The Financial Times sums it up well in “Big Tech groups say their $100bn AI spending spree is just beginning”:

“Tech stocks have been volatile as Microsoft, Meta, Amazon and Google report huge increases in AI investments”.

”Big Tech companies have boosted their capital spending by 50 per cent to more than $100bn this year, as they race to build the infrastructure supporting artificial intelligence, despite growing scepticism from Wall Street about the returns on the unprecedented investment. Microsoft, Alphabet, Amazon and Meta all revealed massive increases in spending in the first six months of 2024 — totalling $106bn — in their latest quarterly earnings reports, as their leaders brushed off stock market jitters to pledge further investment hikes over the next 18 months.”

“At this point, I’d rather risk building capacity before it is needed, rather than too late,” Meta chief Mark Zuckerberg said this week, as he predicted the Facebook parent’s capital spending could hit $40bn this year. Their collective forecasts mean Big Tech’s AI-related investment could more than double by year-end.”

Of course, these types of re-commitments to AI capex budgets, brought on the expected ebb and flow in the markets:

”Big Tech’s latest round of earnings reports collided with a broader dive in Wall Street sentiment, as the Nasdaq fell into a correction on Friday on weaker US jobs numbers. Shares in semiconductor companies, including the leading AI chipmaker Nvidia, have been particularly volatile this week as investors grew more sensitive to Big Tech’s comments on spending plans. Nvidia gained or lost about $200bn in each of three successive trading sessions, while Intel, which is yet to capture much of the spending on AI infrastructure owing to its lack of competitive products, lost more than a quarter of its value on Friday after announcing massive job cuts.”

The whole piece is worth reading, for additional data and charts, and specific examples of spending vs revenue expectations by company.

But the broader point remains, as I summarized in this Saturday’s AI Weekly Summary:

“Big Tech Earnings Results on track: Big Tech companies like Google, Microsoft, Meta, Amazon, Apple and others reported generally good results in another earnings season, while reiterating their ongoing commitments to record AI investments. While each received different reception on post-earnings trading, the general message continues to be confidence by management of the companies on their ongoing AI outlays, and planned AI deployments. The broader backdrop of course is the increasing focus on AI Scaling capex vs timing of AI revenues. More here.”

AI Scaling laws continue to drive these eye-opening capex investments this early in this AI Tech Wave. And so far, the big tech companies can afford these tens of billions of expenditures per quarter.

But AI Scaling of both the LLM AI models, and the underlying AI datacenter, power, talent and other scarce inputs requires these annual numbers going up by multiples per year. And that is likely going to face more questions on the timing of investments vs revenues. And likely increased debates and volatility in both the private and public markets, where patience is not always a virtue. Stay tuned.

(NOTE: The discussions here are for information purposes only, and not meant as investment advice at any time. Thanks for joining us here)