Investors are practically begging AI's big spenders to blink. Who will be first?
Markets are making the option of pulling in the reins -- or at least keeping capital spending steady -- tantalizing.
Google parent Alphabet's stock fell almost 7% after it reported quarterly earnings last week that included a $10 billion hike in capital spending to around $200 billion this year. The spending put Alphabet into free-cash-flow-negative territory for the first time since its IPO a couple of decades ago.
Investors weren't kind to Tesla, either. While its outlays on AI are nothing compared with those of Big Tech, an upgrade to $5.8 billion of spending in the second quarter put investors on edge. Tesla's stock was down about 12% the following day.
Those developments make this week all the more interesting. Microsoft and Meta -- two other top AI spenders -- report quarterly results on Wednesday. Both have big spending plans and big ambitions. But both know that investors are skittish about a spending surge that has yet to deliver returns good enough to justify the outlays.
Meta may have the biggest incentive to back down. Lacking a cloud-computing operation or a corporate-software franchise, it has fewer ways than its peers to translate today's AI spending into tomorrow's revenue. It is also more financially stretched; its debt-to-equity ratio is higher than Microsoft's or Alphabet's, and it is unclear how it can keep raising spending without borrowing a ton more.
Meta's AI strategy, moreover, has been all over the place, marked by technical missteps and delays, frequent reorganizations and leadership changes. And its other non-social-media pursuits, from virtual-reality headsets to smart Ray-Ban glasses, involve lots of spending but not much in the way of financial returns.
Meta should choose pursuits where it is making good returns and ditch the others, Needham analyst Laura Martin said in a note on Friday. "We believe Meta's strategy diffusion wastes shareholder capital," she wrote.
History suggests investors could force Meta's hand. Back in 2022, when the company was spending heavily on the so-called metaverse, it reported dismal third-quarter results. Its Reality Labs unit, which houses its VR hardware efforts, had a $9.4 billion operating loss in the first nine months of the year.
The company's stock lost almost a quarter of its value the following day. Meta responded by laying off staff at Reality Labs and cutting costs -- although the unit continued to lose money at a rapid clip as its focus shifted toward AI.
It is increasingly possible to envision a similar scenario if investors punish Meta over further hikes in capital spending. At the same, Meta chief Mark Zuckerberg is a true believer in AI. Unless others are already doing so, it won't be easy for him to close Meta's pocketbook.
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