This week, the world’s most affluent tech companies made it unequivocally clear: their relentless investment in artificial intelligence shows no signs of slowing down.
However, these massive financial commitments from Google, Meta, Microsoft, and Amazon – all of whom hiked their AI budgets by billions to satisfy what they call burgeoning demand – are increasingly sparking fears that the tech sector might be inflating a perilous new bubble.
Artificial intelligence, in its current state, remains largely untested and incredibly costly, with full development potentially years away. The long-term returns on AI products, such as sophisticated chatbots, are still a big question mark. Financial experts also note that smaller firms chasing AI success lack the vast financial reserves of these industry titans.
The Bank of England recently highlighted a growing trend: while major tech firms have largely self-funded the construction of massive data centers essential for AI, future expansion will increasingly rely on debt. This signals a potential risk, especially if AI technology fails to deliver on its promise or if its computational needs prove to be less than anticipated.
“This is a fast-evolving topic, and the future is highly uncertain,” the bank aptly put it.
These anxieties intensified this week following a cascade of earnings reports. On Wednesday, Google announced an additional $6 billion allocation for AI data center projects this year, building on the nearly $64 billion already spent in the last nine months.
Microsoft revealed a $35 billion expenditure in its most recent quarter, exceeding its previous investor guidance by $5 billion. Similarly, Meta revised its spending projections upwards to a staggering $70 billion by year-end, almost doubling its previous year’s outlay.
Amazon followed suit on Thursday, declaring its intent to be “very aggressive” in expanding its data center footprint, with capital expenditures set to hit $125 billion this year and an even larger sum planned for next year.
These three titans – Google, Microsoft, and Amazon, leading cloud computing providers in the U.S. – reported a shortfall in computing power to meet escalating customer demand. This comes despite a collective $112 billion spent on capital expenditures, including data center construction, in just the last three months. Over the past year, these three alongside Meta have collectively invested over $360 billion.
Amy Hood, Microsoft’s finance chief, expressed surprise to investors, stating, “I thought we were going to catch up. We are not. Demand is increasing. It is not increasing in just one place. It is increasing across many places.”
Concurrently, Federal Reserve Chair Jerome H. Powell weighed in on the sustainability of the AI expansion. He distinguished current AI investments from the dot-com bubble of the late 1990s, noting that the earlier boom was driven by “ideas rather than companies,” clearly indicating a “clear bubble.”
Today, Powell argued, the major players spearheading this transformation are well-established, highly valued, and predominantly self-financing their growth, rather than relying on speculative loans.
He elaborated, “I won’t go into particular names, but they have earnings, and it looks like they have business models and profit and that kind of thing, so it is really a different thing.”
However, Powell remained silent on the precarious position of smaller companies. These firms, often clients and collaborators of the cloud computing behemoths, are also rapidly investing in AI projects but lack the substantial safety net of the giants’ highly profitable advertising and software divisions.
For the quartet of wealthy companies reporting earnings this week, however, investing hundreds of billions into new data centers presents little concern. This is especially true given their colossal combined operating profit of $109 billion in the last quarter alone, even after accounting for taxes and other investments.
Ms. Hood further highlighted Microsoft’s strong position, revealing $400 billion in future sales already under contract. “That’s for booked business,” she emphasized, “Today.” This figure remarkably excludes the $250 billion commitment from OpenAI, the creator of the ChatGPT chatbot, to purchase computing power from Microsoft, announced just this week.
(It’s worth noting that The New York Times has filed a lawsuit against OpenAI and Microsoft, alleging copyright infringement of news content in relation to their AI systems. Both companies have refuted these claims.)
Alphabet, Google’s parent company, revised its projected spending for the year upwards from $85 billion to at least $91 billion. CEO Sundar Pichai noted that the company is now processing a staggering 20 times more data through its diverse AI products compared to a year ago.
Amazon’s CEO, Andy Jassy, informed investors on Thursday that the company has already doubled its cloud infrastructure capacity since 2022 and plans another doubling by 2027 to keep pace with demand. He asserted, “As fast as we’re adding capacity right now, we’re monetizing it.”
Meta, the parent company of Instagram, Facebook, and WhatsApp, also increased its annual spending forecast from $66 billion to at least $70 billion. However, their justification for these massive outlays took a different approach.
Unlike major cloud providers who serve various clients, Meta’s AI monetization is tied directly to its internal use – enhancing digital ad performance and improving user engagement across its social platforms. Furthermore, Meta is pouring significant resources into developing “superintelligence,” an ambitious theoretical technology aiming for AI systems to surpass human intellect.
Mark Zuckerberg, Meta’s CEO, explained his strategy: prioritize building extensively now to be fully prepared if superintelligence emerges rapidly. He stated, “That way, if superintelligence arrives sooner, we will be ideally positioned for a generational paradigm shift in many large opportunities.”
Should the development of superintelligence take longer, Zuckerberg noted, Meta’s existing infrastructure could still benefit its core business. “In the worst case,” he added, “we will just slow building new infrastructure for some period while we grow into what we build.”
However, investors reacted with caution, leading to an 11 percent drop in Meta’s stock on Thursday.
