Investors Worry About the Returns on Huge AI Investments by Big Tech

Big tech firms, such as Microsoft, Amazon and Meta are ramping up their expenditure to build artificial intelligence data centers in a bid to address huge demand. However, Wall Street is getting jittery about the impact that such cost outlays are having on the short term gains on the money expended.

Meta and Microsoft disclosed on Wednesday that their capex (capital expenditure) was growing because of their investments in AI. Alphabet, the parent company of Google, also admitted a day earlier that their AI expenses will remain elevated. Amazon also revealed that its AI capital outlay would rise as this year draws to a close, and the trend would continue next year. Similar announcements are coming out from other technology giants in the industry.

These huge expenses are poised to exert pressure on the firms’ margins and spook investors whose focus is on their gains in the short term. Because of this jitteriness, tech stocks slid. Meta’s share price saw a 4% decline while Microsoft saw a 6% drop. Amazon slipped 3.4%. These declines happened in spite of each of those companies exceeding their revenue and profit projections for the recently ended fiscal quarter.

Beatriz Valle, an analyst at GlobalData, says AI technology is costly to run. She added that major tech firms were racing to establish AI capacity yet it will require time for those technologies to attract mass adoption and yield the expected returns on investment.

Andy Jassey, Amazon’s CEO, asserted during a call that the AI opportunity was something that happened once in a lifetime, and companies’ higher expenditure directed at setting up the needed software was justified if they hoped to gain from the boom. The AI budgets of the big tech firms are testament to this belief. In one quarter, Microsoft now invests capex that exceeds what it used to allocate in an entire year prior to 2020. Amazon’s capex has grown from $48.3bn last fiscal year to approximately $75bn this fiscal year.

As these firms race to pump billions into their AI projects, they have to contend with a number of crippling constraints. For example, AI chips are in short supply, and market leader Nvidia revealed its capacity was so strained that it was struggling to take full advantage of the exploding demand for its products. Similarly, Advanced Micro Devices also admitted that demand growth for their AI chips outstripped their supply. These constraints are weighing down on the plans of tech firms to build the capacity that they need to develop the AI products they wish to bring to market. Nonetheless, they are determined to work as best they can to position themselves well in this race to dominate the nascent industry.

As enterprises like D-Wave Quantum Inc. (NYSE: QBTS) continue to innovate within the AI software space, the capex of tech firms could rise but eventually reach a peak as higher computational power systems which are more efficient hit the market.

NOTE TO INVESTORS: The latest news and updates relating to D-Wave Quantum Inc. (NYSE: QBTS) are available in the company’s newsroom at https://ibn.fm/QBTS

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