Tech earnings season is in full swing, with a handful of notable companies still needing to report, including Apple (AAPL) and Nvidia (NVDA), but one important thing has stuck with the announcements so far. Spend money on AI.
Four of the tech industry’s biggest AI players – Amazon (AMZN), Google (GOOG, GOOGL), Meta (META), and Microsoft (MSFT) – have pointed to increases in capital spending, but without providing many specifics. , each of which is claiming growth in AI sales. Spending to meet AI demand.
Microsoft last week said it spent $14 billion in capital spending related to building AI in the third quarter, up from $7.8 billion in the same period last year. The company’s capital spending for 2024 has already exceeded its investment for all of 2023, and there are still quarters left in the fiscal year.
Google’s parent company Alphabet spent $12 billion last quarter and said it would continue at that pace for the rest of the year. Mehta similarly said he would increase full-year spending from $30 billion to $37 billion to $35 billion to $40 billion. And CFO Susan Lee said that number will increase next year as well.
And on Tuesday, Amazon announced that its capital spending would exceed last year’s $48.4 billion, saying the $14 billion it spent in the first quarter would be its lowest amount this year.
Those are piles of cash. And while there are early signs that AI is driving revenue growth, it will take time for it to have a true impact on companies’ bottom lines.
“We think it’s going to take a 12-18 month investment period for a lot of this to really pay off,” TECHnaracy founder and chief analyst Bob O’Donnell told Yahoo Finance. .
AI Test the Water
Generative AI is still a relatively new technology. While it certainly exploded in 2023, companies have been slow to move, with many only just beginning to experiment with generative AI applications across business segments.
“When you sign up for Microsoft 365 at Microsoft, are you signing up all 100,000 employees or are you signing up 500 people to check it out?” O’Donnell said. he asked, adding that companies are starting with a small number of sign-ups to understand how to best leverage AI applications in their operations before signing up the rest of their workforce.
This isn’t necessarily a bad thing for technology companies. Microsoft said on its earnings call last week that AI accounted for 7 percentage points of revenue growth for its Azure and other cloud services businesses. This was up from 6 percentage points in the previous quarter and 3 percentage points in the quarter before that. In the fourth quarter of last year, the company announced that AI boosted Azure growth by one percentage point.
And while it may seem like growth is plummeting, Microsoft CFO Amy Hood said it’s more a result of a lack of available AI capabilities. In other words, Microsoft didn’t have the resources it needed to meet customer demand.
Ruth Porat, Google’s chief financial officer (CFO), noted in the company’s earnings conference that AI sales are increasing as well, and that Google’s cloud platform is increasing the contribution of AI to revenue. However, he did not provide exact numbers.
On Amazon’s side, CFO Brian Olsavsky said customers continue to sign up for large, long-term contracts with Amazon Web Services, and many are adding generative AI components.
Expenses won’t come down anytime soon
It may take a year or more for AI-based revenue growth to really take off, but that doesn’t mean companies will ease up on spending. Forrester analyst Rowan Curran said companies have been pouring money into AI technology for years. Generative AI has skyrocketed that spending.
“We’ve seen significant growth and investment over the past… year and 18 months, and this has been a continuous increase over the past, eight or 10 years,” he said.
And tech companies are preparing investors for a long road ahead. During Meta’s earnings call last week, CEO Mark Zuckerberg sought to allay concerns that the social media giant would need to pour money into AI efforts. But that opinion went largely unheeded, as the stock price fell 14% the morning after the announcement.
Meanwhile, Hood said Microsoft will continue to drive AI spending, and that level will likely be the same in fiscal 2025 as it was throughout the company’s 2024 fiscal year.
Olsavsky offered a similar outlook for Amazon, saying the company would put money into generative AI services.
“We will continue to meaningfully increase our capital spending, the majority of which will… support our AWS infrastructure, particularly our generative AI efforts,” he said on the company’s earnings call.
From now on, companies just need to prove that all their spending is paying off and provide the numbers to match.
Email Daniel Howley at [email protected]. Follow him on Twitter @Daniel Howley.
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