AI Capex Apparently Not an Issue So Long as a Firm is Making Lots of Money

The last quarter’s financial reporting suggests financial analysts and investors can tolerate uncertain capital investments in artificial intelligence without qualms so long as the topline revenue and bottom line profits are there. 

Or at least that would seem to be the case, as Meta did not immediately suffer when it announced it was raising its AI capex, though Google was hammered. 

Amazon and Microsoft had mixed reports: Amazon reporting smaller-than-expected revenue growth and profits, Microsoft actually beating expectations for revenue and profit, but showing some weakness in cloud computing. 

Though all the firms’ stock prices were hit by a big downdraft in early August, Meta has held up best. 

Perhaps Meta’s reported ad revenue growth, along with its planned AI investments, shows one way to calm observers: keep making money while investing. That might be easier for some than others, as Amazon might face consumer spending headwinds. For Google, the issue seems more related to concerns about growing search competition, Microsoft could be dinged by a recession that slows enterprise information technology spending. 

In the near term, in other words, so-called “AI stocks” might be evaluated based primarily on how their core legacy businesses are situated, irrespective of any future benefit from AI operations and products, since such benefits will not be obvious for some time. 

And the revenue results might not match the market reaction. As was the case at Alphabet and Meta, Microsoft revenue was up 15 percent, year over year in the second quarter of 2024. Amazon revenue also was up, but less than financial analysts had expected. 

Except at Amazon, revenue growth was not the immediate issue. Instead, capex growth is the concern.

Al capex is up at Microsoft, but “roughly half of FY2024's total capital expense as well as half of fourth-quarter expense, it's really on land and build and finance leases, and those things really will be monetized over 15 years and beyond,” said Amy Hood, Microsoft CFO. 

Over at Alphabet, second-quarter 2024 revenues were up 14 percent (15 percent) in constant currency, year over year. But AI capex is expected to hit $50 billion in 2024. 

Market watchers seem to see danger for Alphabet’s search revenue stream as rival AI suppliers seek to cut into Google’s search dominance, beyond the issue of AI capex magnitude. 

 “The risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where it turns out that we are over investing,” said Sundar Pichai, Alphabet CEO. 

It also is worth noting that, because of regulatory scrutiny, it no longer is possible for Alphabet to “acquire” positions in markets or capabilities. Instead, it has to grow them organically. 

The implications of Meta’s positioning on AI capex might be about as good as it gets: robust core revenue drivers able to support AI capex. Alphabet’s ad growth was not as good as Meta’s in the second quarter, and beyond that there are the concerns of search market share dangers. 

“While we expect the returns from Generative AI to come in over a longer period of time, we’re mapping these investments against the significant monetization opportunities that we expect to be unlocked,” Zuckerberg noted.

In the particular case of Meta, at least some analysts and observers will be heartened by the apparent recognition on Meta’s part that AI is the more-immediate opportunity, compared to augmented reality, for example. 

“A few years ago, I would have predicted that holographic AR would be possible before Smart AI, but now it looks like those technologies will actually be ready in the opposite order,” said Zuckerberg. 

Commenting on “the AI platform shift,” Similar to the cloud, this transition,  Satya Nadella, Microsoft Chairman and CEO, noted that AI is similar to the prior transition to cloud computing, involving  capital-intensive investments. 

In other words, investment has to be made. Public companies that continue to have strong revenue and profit growth will essentially get a pass. But other firms will face greater scrutiny.