By Tom Dotan
The world's biggest technology companies had a similar message to investors this past week: We need to spend billions of dollars every quarter to develop our artificial-intelligence products.
Those huge spending plans got mixed reactions.
Shares of Microsoft and Google parent Alphabet jumped after the companies suggested the spending was to meet growing demand for their AI products.
"That is partially why you see the capital investment in the shape it is, " Microsoft financial chief Amy Hood said on the company's earnings call Thursday, "because right this minute, we do have demand that exceeds our supply by a bit."
Meta Platforms, meanwhile, saw its stock have its worst day in 18 months after the company raised its capital-expenditure projections for 2024 by as much as $10 billion to cover the costs of building out its AI. Chief Executive Mark Zuckerberg warned of years of aggressive spending before seeing a substantial return.
"I also expect to see a multiyear investment cycle before we fully scale Meta AI, business AIs, and more, into the profitable services," Zuckerberg said Wednesday.
The different reactions show how investors, one year into the AI boom, are becoming more discerning in how they interpret company spending and want to see a path to profit, said Rishi Jaluria, an analyst with RBC Capital.
"There is more scrutiny placed on what a company's AI strategy is," he said. "If you don't have a strategy and are spending a lot, then there is going to be concern."
Tech companies are in the midst of an infrastructure build-out not seen since the dot-com days in an expensive race to create products and services that use artificial intelligence. Building to accommodate AI is costly because the new technology requires a lot more computing power, energy and pricey chips.
Microsoft said it is on a path to spend $14 billion a quarter on equipment and property in the midst of its AI buildout, a number that it projected would increase in subsequent quarters. The company also pointed to evidence of some early returns on its investment.
The company said 7 percentage points of the quarterly revenue growth in its Azure cloud computing business came from the use of its AI services. Much of that was likely from the use of OpenAI's products, such as ChatGPT, which is hosted exclusively on Azure. Microsoft also charges for its AI-infused Copilot assistants, including its coding assistant, GitHub Copilot, which the company disclosed has 1.8 million users.
As Hood detailed the company's spending plans, Microsoft shares rose as much as 5% in after-hours trading.
Hood said Microsoft will spend in sync with emerging demand movements. "These expenditures over the course of the next year are dependent on demand signals and adoption of our services," she said.
AI is also changing Alphabet's cloud, search, YouTube and other services, said Chief Financial Officer Ruth Porat. She said the company's capital expenditure of $12 billion in the first quarter was likely to stay at or above that level.
"The significant year-over-year growth in capex in recent quarters reflects our confidence in the opportunities offered by AI across our business," Porat said.
Chief Executive Sundar Pichai said he was encouraged by the increase in search usage by people deploying AI tools but offered few details on how the technology is helping the company's financials.
A day after Alphabet's earnings report, the company's stock closed at a record high.
Meta's message fell flat, as its shares dropped 11% the day after announcing its escalation in spending.
Meta has invested heavily in building a family of large language models. The latest one, Llama 3, was released earlier this month and the company said it performs nearly as well as OpenAI's most advanced tech. But Meta is releasing Llama 3 for free as open-source software. Until the company decides to charge for it, there is nothing to offset the enormous costs of building and running it.
"We've historically seen a lot of volatility in our stock during this phase of our product playbook, where we're investing and scaling a new product but aren't yet monetizing it," Zuckerberg said, pointing to the company's past investments to develop Reels, Stories and its mobile offering.
"Historically, investing to build these new scaled experiences in our apps has been a very good long-term investment for us and for investors who have stuck with us," Zuckerberg said.
Meta is coming off its year of efficiency, in which the company has been cutting costs. Those cuts were made to help pay for its previous bet on the metaverse and led to the company's valuation tripling in 2023. The metaverse has yet to do much for Meta, other than persuade it to change its name, so there is a lot of skepticism if the company can capitalize on this next thing, said RBC's Jaluria.
"People get nervous with them and capex," he said.
Historically, Wall Street has been cautious about overheated infrastructure spending in the face of promised future profit. Some observers are comparing the current AI investment cycle to telecom companies' exuberant overbuilding of fiber-optic networks more than 20 years ago.
The dot-com boom of the 1990s led to speculation that soaring internet use would require enormous amounts of fiber-optic cables to carry the traffic. Companies such as Tyco International spent billions of dollars laying such cables that ultimately weren't needed.
The cost of that overbuilding, plus the dropping price of broadband from oversupply, forced companies such as AboveNet, XO Communications and Global Crossing to seek bankruptcy-court protection. The low prices and excess capacity dogged the telecom industry for more than a decade.
"Unlike many companies in the dot-com era, the megacaps behind the current build-out of cloud infrastructure are already profitable," said Lei Qiu, a portfolio manager at AllianceBernstein, in a recent report. "Today's profitable AI stalwarts are spending on cloud infrastructure primarily to improve efficiency."
Microsoft and Alphabet said much of the extra AI spending is being offset by cuts in other parts of their companies. They said their profit margins would be only slightly affected thanks to cost management they have done in other parts of the business.
"We are very cognizant of the increasing headwind we have from higher depreciation and expenses associated with the higher Capex," Alphabet's Porat said.
Write to Tom Dotan at tom.dotan@wsj.com
(END) Dow Jones Newswires
April 26, 2024 21:00 ET (01:00 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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