Wall Street Skeptical of Big Tech's AI Profit Potential Despite Massive Investments

Big Tech fails to convince Wall Street that AI is paying off

(Bloomberg) -- Amazon.com Inc., Microsoft Corp. and Alphabet Inc. had one job heading into this earnings season: show that the billions of dollars they've each sunk into the infrastructure propelling the artificial intelligence boom is translating into real sales. In the eyes of Wall Street, they disappointed. Shares in Google owner Alphabet have fallen 6.1 per cent since it reported last week. Microsoft has declined in the two days since its own results. Amazon -- the latest to drop its earnings on Thursday -- slid in premarket trading. Silicon Valley hailed 2024 as the year that companies would begin to deploy generative AI, the type of technology that can create text, images and videos from simple prompts. This mass adoption is meant to finally bring about meaningful profits from the likes of Google's Gemini and Microsoft's Copilot. The fact that those returns have yet to meaningfully materialize is stoking broader concerns about how worthwhile AI will really prove to be. The technology represents an enormous opportunity -- and that opportunity continues to grow, said Daniel Morgan, a senior portfolio manager at Synovus Trust. "But unfortunately, so does the upfront investment." Investors are left to wonder, he said: "Can these hyper-scalers capture enough incremental increase in profit growth from their investments?" A winning product would also do the trick, he added. It wasn't all bad. The three tech titans reported a healthy pace of growth in their cloud-computing divisions, the most obvious business to benefit from generative AI as the technology requires copious amounts of computational resources to perform. Those gains weren't enough though to appease investors who are growing increasingly impatient to see returns from quarter after quarter of heavy spending on data centers and other AI infrastructure. Amazon projected third-quarter operating income that fell shy of analysts' estimates on Thursday. Chief Executive Officer Andy Jassy has been waging a cost-cutting campaign to free up resources to invest in AI. "It's really a positive indicator when we step up capital expenditures," Amazon Chief Financial Officer Brian Olsavsky said while working to assure investors and analysts on a call Thursday. The company's capital expenditures totaled US$30.5 billion, mostly in its AWS cloud unit, in the first half of the year. Jassy said the company has developed sophisticated algorithms to guide its investment decisions so that it builds enough capacity to meet demand without denting profits. He's vowed the investments will be worth it to support what he and his team have called a multibillion-dollar revenue run rate business. Alphabet's outlook for the AI growth that investors should expect was short on specifics. Chief Investment Officer Ruth Porat said on a call with analysts that the company had "seen the benefit of our strength in AI, AI infrastructure, as well as generative AI solutions for cloud customers," without detailing how much of the cloud unit's growth could be attributed to investment in the technology. Wall Street's concerns about capital expenditures, which totaled $13.2 billion in the quarter, overshadowed better-than-expected sales. Shares fell five per cent the day after the results. Microsoft also disappointed. Sales growth for Azure, the company's cloud computing service, slowed from the previous period. Microsoft said AI drove 8 percentage points of Azure's growth in the quarter, compared with seven percentage points in the previous period. Analysts pressed Microsoft executives during a call to explain whether the sales growth would justify such heavy spending. CEO Satya Nadella stressed the investments were driven by customer demand. One company that has bucked trend is Facebook parent Meta Platforms Inc. The company unexpectedly raised its forecast for capital expenditures, citing AI investments, but it's second-quarter revenue also beat expectations. CEO Mark Zuckerberg credited spending on AI with driving improvements in ad targeting and content recommendations. On Thursday, Apple Inc. similarly said new AI features will spur iPhone upgrades in the coming months, helping the company reemerge from a sales slowdown that has hit its China business especially hard. Zuckerberg has framed Meta's sky-high spending on AI as a short-term sacrifice for long-term gain. To justify what could amount to a total of $1 trillion of investment in AI infrastructure over the next several years, companies need to show the technology is capable of solving increasingly complicated tasks. It must go beyond the incremental improvements that tools have delivered to professions such as coding and advertising, Jim Covello, the head of equity research at Goldman Sachs Group Inc., said in July. Covello, who has emerged as a leader of a small but growing cohort casting doubt on the AI rally, has predicted that the tide will turn against the AI rally in the next year and a half if more significant use cases for the technology don't start emerging. In a mid-July interview, Zuckerberg worked to justify his industry's spending and encouraged the market to look to the future. "I actually think all the companies that are investing are making a rational decision," he said at the time. "The downside of being behind is that you're out of position for, like, the most important technology for the next 10 to 15 years."

Wall Street to Big Tech: Is AI ever going to make money?

In earnings calls over the past two weeks, Wall Street analysts pushed tech leaders for answers about when their investments in AI would start to pay off. There's been one big question on the minds of Wall Streeters this tech earnings season: When will anyone start making actual money from artificial intelligence? In the 18 months since ChatGPT kicked off an AI arms race, tech giants have promised that the technology is poised to revolutionize every industry and used it as justification for spending tens of billions of dollars on data centers and semiconductors needed to run large AI models. Compared to that vision, the products they've rolled out so far feel somewhat trivial -- chatbots with no clear path to monetization, cost saving measures like AI coding and customer service, and AI-enabled search that sometimes makes things up. But Big Tech still has relatively little to show for all their billions spent in terms of significant revenue gains from AI or profitable new products, and investors are starting to get antsy. Amazon's (AMZN) lousy earnings and outlook Thursday could be mostly chalked up to concerns that it is spending a ton on AI without much to show for it. That dragged the stock down 9% in premarket trading Friday. Intel's (INTC) stock plunged 21% in premarket trading after the company said its massive undertaking to adapt to the AI wave will cost it $10 billion and tens of thousands of layoffs. In short, investors' fears can be boiled down to: is all of this actually worth anything? Or is it just another shiny object the industry is chasing to bring back its dreams of endless growth, before it abandons it and moves onto the next big thing? As Morgan Stanley analyst Keith Weiss put it on Microsoft's earnings call: "Right now, there's an industry debate raging around the (capital expenditure) requirements around generative AI and whether the monetization is actually going to match with that." UBS analyst Steven Ju asked Google CEO Sundar Pichai how long it would take for AI to "help revenue generation ... (and) create greater value over time, versus just cutting costs?" And a Goldman Sachs report last week asked if there was "too much spend, too little benefit" on generative AI. Shares of both Google and Microsoft dipped following their earnings reports, a sign of investors' discontent that their huge AI investments hadn't led to far-better-than-expected results. Meta -- which experienced similar shareholder frustration last quarter -- avoided the same fate this time around by showing how its AI investments were at least contributing to its core business, including by enabling companies to easily make compelling ads with its AI tools. Some investors had even anticipated that this would be the quarter that tech giants would start to signal that they were backing off their AI infrastructure investments since "AI is not delivering the returns that they were expecting," D.A. Davidson analyst Gil Luria told CNN. The opposite happened -- Google, Microsoft and Meta all signaled that they plan to spend even more as they lay the groundwork for what they hope is an AI future. Meta said it now expects full-year capital expenditures to be between $37 and $40 billion, raising the low end of the guidance by $2 billion. Microsoft said it expects to spend more in fiscal 2025 than its $56 billion in capital expenditures from 2024. Google projected capital expenditure spending "at or above" $12 billion for each quarter this year. (Even for extremely rich companies, those are big numbers -- for Google, its second quarter capital expenditures amounted to about 17% of its total sales). And tech leaders have said that what they need is more time -- a lot more time. Microsoft CFO Amy Hood said on the company's earnings call that its data center investments are expected to support monetization of its AI technology "over the next 15 years and beyond." Meta, similarly, anticipates "returns from generative AI to come in over a longer period of time," CFO Susan Li told analysts. She added: "Gen AI is where we're much earlier ... We don't expect our gen AI products to be a meaningful driver of revenue in '24. But we do expect that they're going to open up new revenue opportunities over time that will enable us to generate a solid return off of our investment." That time horizon is uncomfortable for many investors, who have grown accustomed to mostly reliable, quarter-after-quarter sales and profit growth from Silicon Valley. "If you're going to invest now and get returns in 10 to 15 years, that's a venture investment, that's not a public company investment," Luria said. "For public companies, we expect to get return on investment in much shorter time frames. So that's causing discomfort, because we're not seeing the types of applications and revenue from applications that we would need to justify anywhere near these investments right now." And some investors question whether AI investments will ever pay off. Goldman Sachs analyst Jim Covello argued that "the technology isn't designed to solve the complex problems that would justify the costs" in last week's report. As an example of just how long it can take AI products to come to fruition, take Tesla's AI-based "full self-driving" technology. Tesla has sold the driver-assist technology as key to the company's business plan since 2015, and consistently promised that it would be fully capable within a short timeframe. But FSD still requires an attentive human driver capable of taking the wheel in case something goes wrong, and is regularly plagued by safety concerns, nearly four years after it was first released to Tesla customers. For now, tech CEOs appear to agree that "the risk of underinvesting is dramatically greater than the risk of overinvesting," as Google's Pichai said in last week's earnings call (a similar line was repeated by Meta CEO Mark Zuckerberg during his company's call). Data centers take time to build and if someone is going to come out the winner in the AI race, no company wants to miss their shot at the top simply because they didn't have enough computing capacity. And they're earning enough from their core businesses that investors will put up with the spending for now. But at some point soon -- Luria predicts it will be either later this year or early next -- the pressure from investors to back off on infrastructure investments and let revenue growth play catch-up will be strong enough to get tech leaders to pull back. "Right now, the game is, 'we all have to signal that we're willing to invest as much as we need because we want to keep this leadership position,' but at some point the investment is going to be so onerous that one of them ... will say, 'maybe next quarter, we won't invest so much,' and then you'll see that happening for the rest of them," Luria said. "Big picture, this level of investment is not sustainable."

AI And Cloud In Spotlight As Big Tech Earnings Roll Out

US tech giants saw their shares fluctuate this week as investors tried to gauge whether artificial intelligence will fill coffers or drain them. While it is important to stay on the cutting edge by investing in AI, the market wants financial engines of tech firms going strong to pay for it, according to analysts. Apple and Amazon on Thursday were the latest titans to see quarterly earnings scrutinized over how their core businesses are doing and whether cloud and AI strategies are paying off. Amazon said its profit in the recently ended quarter doubled with the help of renewed momentum of its AWS cloud computing business. Revenue at the AWS cloud computing unit grew, but the e-commerce giant's sales of $148 billion fell just shy of lofty market expectations, and shares dove in after-market trades. Money taken in by Amazon ads was also shy of expectations. Retail, ads and cloud computing are considered Amazon's financial pillars. "While Amazon has multiple levers it can pull, the outlook is becoming tighter," said GlobalData Retail managing director Neil Saunders. "Amazon will remain very profitable but the pace at which it can add to the bottom line appears to be waning," he said. Amazon -- like other tech giants investing in AI -- is also spending more money, a factor investors are watching keenly. "We remain very bullish on the medium to long term impact of AI in every business we know and can imagine," Amazon chief executive Andy Jassy said on an earnings call. "Generative AI especially is quite iterative and companies have to build muscle around the best way to solve actual customer problems," Jassy said. Apple's quarterly profit rose from a year ago, the company said, besting analyst forecasts and giving its shares a boost in after-hours trading. Money taken in by Apple's services unit from digital goods and subscriptions hit an all-time high, while the iPhone maker set a new revenue record overall for the June quarter, according to chief executive Tim Cook. Cook played up the pending public launch of Apple Intelligence -- referring to its suite of AI features. "Apple Intelligence builds on years of innovation and investment in AI and machine learning," Cook said on an earnings call. "It will transform how users interact with technology," he added. Apple has been under pressure to win over doubters on its artificial intelligence strategy after Microsoft and Google rolled out products in swift succession. "For better or worse, Apple has married its AI efforts to other key parts of its core business, particularly the iPhone," said Emarketer analyst Jacob Bourne. He added that the effectiveness of its AI investments will likely be measure by sales of Apple hardware and services. Meta on Wednesday reported profit that beat market expectations and caused its share price to jump. The impressive profit came even though Meta's Reality Labs unit, devoted to virtual and augmented reality products, lost $4.5 billion, which was more than analysts expected. "We are in the fortunate position where the strong results that we're seeing in our core products and business give us the opportunity to make deep investments for the future," Meta founder and chief Mark Zuckerberg said on an earnings call. "I plan to fully seize that opportunity." Microsoft saw its shares slip this week on earnings figures showing its crucial cloud computing unit did not grow as strongly as expected. Shares of Google parent Alphabet dropped on concerns that ad revenue was slowing while costs were on the rise after its earnings release. "Meta stands out from other tech firms that have AI ambitions because it already brings in a massive amount of revenue from digital advertising," said Sonata Insights founder and chief analyst Debra Aho Williamson. "Unlike Google, which is grappling with making changes that will impact its core ad business, most of Meta's AI investments are either aimed at making advertising on its properties work better, or at building new features that could eventually become revenue drivers."

Big Tech Fails to Convince Wall Street That AI Is Paying Off

Amazon.com Inc., Microsoft Corp. and Alphabet Inc. had one job heading into this earnings season: show that the billions of dollars they've each sunk into the infrastructure propelling the artificial intelligence boom is translating into real sales. In the eyes of Wall Street, they disappointed. Shares in Google owner Alphabet have fallen 6.1% since it reported last week. Microsoft has declined in the two days since its own results. Amazon -- the latest to drop its earnings on Thursday -- slid in premarket trading.

Tech's message to Wall Street: We'll keep pouring cash into AI

By the numbers: These companies all continue to grow and remain jaw-droppingly profitable, providing an enviable financial foundation for their most ambitious dreams. Apple and Amazon -- the other two tech giants who aren't as directly in the "build the biggest and best foundation model" race but who both are making their own significant AI investments -- are no slouches, either. Remember, all these numbers are for a single quarter -- multiply by four for a very rough annual picture. Follow the money: When an industry is geysering profits like this, shareholders can try to demand higher dividend payouts. Tech firms have traditionally shunned dividends as a mark of corporate old age, but some of the giants, like Apple, have warmed up to them. Between the lines: Wall Street has already given all these companies massive valuations based on their current businesses and their long-term prospects. CEOs hastened to reassure investors that the best is yet to come, and that their incumbent firms are well-positioned to control the future. As for doubts about the wisdom of plowing so many billions into "capex" (capital expenditures) to build AI capacity, Microsoft CEO Satya Nadella said the company is carefully tuning into the "demand signals" from customers. The bottom line: "When you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting for us here," Google CEO Sundar Pichai told analysts last week.