Tech Giants Defend Massive AI Investments Amid DeepSeek's Breakthrough

Alphabet praises DeepSeek, but it's massively ramping up its AI spending | TechCrunch

Booming AI budgets seemed at risk last week when DeepSeek crashed Nvidia's stock based on speculation that its cheaper AI models would lower demand for AI chips and data centers. Alphabet CEO Sundar Pichai has certainly noticed the Chinese AI company, praising its work as "tremendous" in Alphabet's latest earnings call (while adding that some of Gemini's models are just as efficient). But just like Meta, Alphabet isn't throwing down the towel in Big Tech's AI spending wars. In its latest earnings report, Alphabet announced it would boost capital expenditures to $75 billion -- a whopping 42% increase -- to accelerate its AI progress. Alphabet is betting that cheaper AI will massively boost demand for its services, rather than making it basically free and threatening its business models. The company noted it stands to benefit from this rise in usage -- known as inference -- thanks to its billions of existing users. "Part of the reason we are so excited about the AI opportunity is we know we can drive extraordinary use cases because the cost of actually using it is going to keep coming down, which will make more use cases feasible," Pichai said during the earnings call. "And that's the opportunity space. It's as big as it comes, and that's why you're seeing us invest to meet that moment." Meta CEO Mark Zuckerberg made similar comments in Meta's earnings call last week, pledging to spend "hundreds of billions" on AI in the long term despite all the DeepSeek buzz. Whether this all pans out is unclear, but for now, tech giants can afford the AI bills, and when (or if) they'll slow down is anyone's guess.

Tech Giants Have Been Spending Big on AI. Will DeepSeek Change That?

More efficient models could lower the cost of running AI and encourage the development of more applications, ultimately supporting the need for more data center capacity. The meteoric rise of Chinese start-up DeepSeek may have shaken Wall Street's confidence in some favorite trades, but it's unlikely to change the immediate outlook for the spending that has fueled the AI rally, experts say. "We do not expect companies to present significant shifts in their capital allocation priorities around AI on the back of recent events," wrote Goldman Sachs analysts in a note on Tuesday. Goldman estimates U.S. cloud providers will spend about $270 billion this year on capital expenditures, with much of that going toward data centers and related infrastructure. Just this month, Meta (META) projected capex of $60-$65 billion this year, Microsoft (MSFT) reaffirmed its plans to spend $80 billion, and the White House hosted the announcement of a joint venture between OpenAI, Oracle (ORCL), and Japanese tech investor SoftBank that could spend up to $500 billion in the next four years. Yet the surprising success of DeepSeek's open-source AI model, reportedly developed in less than 2 months at a cost of about $6 million, has prompted Wall Street and Silicon Valley alike to wonder whether all that spending was really necessary, and if it needs to continue. The doubt arises at an inopportune time for America's tech titans. The companies spending big on AI have faced questions over the last year about the sustainability of their spending and when they'll see a return on their investment. To make matters worse, most of the Magnificent Seven stocks were trading at or near record highs before the DeepSeek shock roiled markets on Monday. The question of return on investment will likely take center stage on Wednesday afternoon when Meta, Microsoft and Tesla (TSLA) report quarterly results. Angelo Zino, Senior Vice President and tech analyst at CFRA, agreed with Goldman that Meta and Microsoft were unlikely to change their spending outlook, but noted that executives' commentary could give markets another jolt. If they nod toward slowing spending or indicate that they're looking into being more efficient, he said, "I think that has an impact in terms of how these chipmakers react." The degree to which hyperscalers sustain current spending could to a large degree depend on how much AI demand grows. "If all of a sudden we see a massive uptick in demand here in 2025 related to agentic AI and maybe even cheaper large language models, then these companies will continue to be aggressive with the capex," Zino said. Analysts expect that more efficient inferencing inspired by DeepSeek could dramatically reduce the cost of AI, lowering the barrier to entry for developers and encouraging the development of more consumer and business applications. The economics of AI could ultimately express the Jevons paradox, when technological advancement makes a resource more efficient to use and subsequently increases consumption of that resource. Lower AI pricing could spell trouble for large language model developers like OpenAI or Amazon-backed Anthropic, but greater demand would likely benefit cloud providers. "Those companies will benefit from having the ability to rent more GPU capacity to whoever wants to rent that space," said Zino.

Microsoft, Meta CEOs defend hefty AI spending after DeepSeek stuns tech world

Qwen and Deepseek logos are seen in this illustration taken Wednesday. Reuters-Yonhap Days after Chinese upstart DeepSeek revealed a breakthrough in cheap AI computing that shook the U.S. technology industry, the chief executives of Microsoft and Meta defended massive spending that they said was key to staying competitive in the new field. DeepSeek's quick progress has stirred doubts about the lead America has in AI with models that it claims can match or even outperform Western rivals at a fraction of the cost, but the U.S. executives said on Wednesday that building huge computer networks was necessary to serve growing corporate needs. "Investing 'very heavily' in capital expenditure and infrastructure is going to be a strategic advantage over time," Meta CEO Mark Zuckerberg said on a post-earnings call. Satya Nadella, CEO of Microsoft, said the spending was needed to overcome the capacity constraints that have hampered the technology giant's ability to capitalize on AI. "As AI becomes more efficient and accessible, we will see exponentially more demand," he said on a call with analysts. Microsoft has earmarked $80 billion for AI in its current fiscal year, while Meta has pledged as much as $65 billion towards the technology. That is a far cry from the roughly $6 million DeepSeek said it has spent to develop its AI model. U.S. tech executives and Wall Street analysts say that reflects the amount spent on computing power, rather than all development costs. Still, some investors seem to be losing patience with the hefty spending and lack of big payoffs. Shares of Microsoft -- widely seen as a front-runner in the AI race because of its tie to industry leader OpenAI -- were down 5 percent in extended trading after the company said that growth in its Azure cloud business in the current quarter would fall short of estimates. "We really want to start to see a clear road map to what that monetization model looks like for all of the capital that's been invested," said Brian Mulberry, portfolio manager at Zacks Investment Management, which holds shares in Microsoft. Meta, meanwhile, sent mixed signals about how its bets on AI-powered tools were paying off with a strong fourth quarter but a lackluster sales forecast for the current period. "With these huge expenses, they need to turn the spigot on in terms of revenue generated, but I think this week was a wake-up call for the U.S." said Futurum Group analyst Daniel Newman. "For AI right now, there's too much capital expenditure, not enough consumption." There are some signs though that executives are moving to change that. Microsoft CFO Amy Hood said the company's capital spending in the current quarter and the next would remain around the $22.6 billion level seen in the second quarter. "In fiscal 2026, we expect to continue to invest against strong demand signals. However, the growth rate will be lower than fiscal 2025 (which ends in June)," she said. (Reuters)