Big Leaps, Small Worries: Big Tech in an Investment Frenzy for AI Data Centers

The giants of the technology sector, including Microsoft and Meta, are massively increasing their expenditures to meet the enormous demand for AI data centers. However, Wall Street demands quick returns on these multibillion-dollar investments. On Wednesday, both Microsoft and Meta announced that their capital expenditures are significantly rising due to AI investments. Alphabet also reported on Tuesday that these expenditures would remain high, and Amazon is expected to give similar forecasts on Thursday. The extensive capital commitment could threaten the lucrative margins of these companies and exert pressure at this critical point, which could alarm investors. Shares of the major tech companies declined in after-hours trading on Wednesday, underscoring the challenges these companies face as they strive to align ambitious AI initiatives with the demands for short-term results. Meta's stock fell by 2.9% in after-hours trading, and Microsoft's price dropped by 3.6%, even though both exceeded expectations in profit and revenue during the July to September period. Amazon's stock also recorded a decline. "Operating AI technology is costly. Acquiring capacity is expensive," explained Beatriz Valle, an analyst at GlobalData. "It has triggered a competitive race among the major technology firms to expand capacities. It will take some time before returns become visible and the technology becomes widely adopted." Microsoft’s expenditures for a single quarter now exceed its entire annual expenditures up to 2020, according to Visible Alpha. At Meta, quarterly expenditures equate to the annual investments up to 2017. Microsoft reported a 5.3% increase in capital expenditures to $20 billion in its first fiscal quarter and forecasts higher AI spending in the second quarter. However, the growth of its core Azure business is expected to slow, with data center capacity constraints being the cause. "I think investors overlook that Microsoft, for every year of over-investment—like this year—creates a whole percentage point of negative impact on margins for the next six years," said Gil Luria, head of technology analysis at D.A. Davidson. Meanwhile, Meta warned of a "significant acceleration" in AI-related infrastructure spending next year. Capacity constraints pervade the technology sector, with chip manufacturers like market leader Nvidia struggling to keep pace with demand, making it even harder for cloud companies to expand capacities. Advanced Micro Devices, which recently reported results, stated that demand for AI chips is growing faster than supply, limiting the ability to fulfill orders. The company warned that the supply of AI chips might remain tight in the coming year.