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Home » Is AI the Next Dot-Com Bubble? Tech Giants Bet Big as Stocks Dip Despite Strong Earnings

Is AI the Next Dot-Com Bubble? Tech Giants Bet Big as Stocks Dip Despite Strong Earnings

…Investors Worry About Profitability

Joan Aimuengheuwa by Joan Aimuengheuwa
October 31, 2024
in DisruptiveTECH
0
Is AI the Next Dot-Com Bubble? Tech Giants Bet Big as Stocks Dip Despite Strong Earnings
Source: Getty Images

Source: Getty Images

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Tech giants, including Microsoft and Meta, have increased their capital expenditure to develop artificial intelligence (AI) data centres, aiming to meet the surging demand for AI technologies. 

While these investments show a strong commitment to expanding AI advantages, investors are wary of possible impacts on short-term profitability.

On Wednesday, Microsoft and Meta reported that their spending on AI infrastructure had sharply risen, with Alphabet also revealing similar trends in its own report on Tuesday. 

Amazon, which will release its earnings shortly, is expected to follow suit with comparable forecasts. These growing costs reiterate a collective industry-wide race to enhance AI infrastructure, but they also pose a threat to the companies’ profit margins—a factor likely to unsettle investors prioritising near-term returns.

In response, big tech stocks dipped in after-hours trading on Wednesday. Meta’s shares dropped by 2.9%, and Microsoft saw a 3.6% decline, even though both companies had surpassed analysts’ revenue and profit expectations for the recent quarter. 

Amazon’s shares also saw a slight decrease. Beatriz Valle, an analyst at GlobalData, explained, “The expense of running AI systems is high, with capacity demands escalating.” She added that while the sector is rapidly expanding AI capabilities, it will take considerable time before companies see actual returns on these investments.

Microsoft, whose quarterly capital spending now surpasses its entire annual expenditure until 2020, reported a 5.3% increase in spending, reaching $20 billion in its first fiscal quarter. 

However, the tech giant anticipates slower growth in its Azure cloud business due to data centre limitations. Gil Luria, head of technology research at D.A. Davidson, noted that Microsoft’s heavy spending in the current year could weigh on profit margins over the next several years, suggesting that each year of aggressive investment adds a long-term cost to its balance sheet.

Meta, likewise, warned of accelerated AI infrastructure costs for the coming year, pointing to a current focus on AI development despite the financial limitations.

The bottlenecks within the industry, such as limited capacity in data centres and challenges in the semiconductor supply chain, continue to hinder growth. 

Even Nvidia, a leading chip manufacturer, is struggling to meet demand for AI chips, with supply constraints expected to persist into next year. Advanced Micro Devices (AMD) also reported this week that demand for its AI chips is outpacing supply, impacting its ability to capitalise on market demand.

Although, both Microsoft and Meta have positive views about the future. Mark Zuckerberg, CEO of Meta, likened the AI infrastructure investments to the early days of cloud technology expansion, highlighting the massive potential still untapped in the AI sector.

“Investors may be concerned with the short-term expenses, but the opportunities we’re building toward are substantial,” Zuckerberg asserted during Wednesday’s earnings call.

These tech giants are focused on the long-term prospects of artifice intelligence technology, though they face the challenge of managing investor expectations while pursuing ambitious AI-driven strategies. 

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