NEW YORK / LONDON (IT BOLTWISE) – Big tech companies are facing a pivotal phase in which their investments in artificial intelligence (AI) could change market dynamics. While Amazon hit a record high, Meta is falling short of expectations. Analysts and investors alike are concerned with the question of how these investments will pay off in the long term.
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The major technology companies, often referred to as the ‘Magnificent 7’, recently released their quarterly results. It showed that all except Meta recorded a positive price increase after the publication of their results. Amazon in particular stood out and reached a record high. These developments raise the question of how massive investments in artificial intelligence (AI) will impact the future performance of these companies.
A key issue is the demand for AI infrastructure and tools, which currently exceeds supply. According to Evan Schlossman of SuRo Capital, companies are seeing bottlenecks in their ability to meet demand, leading to an increase in spending. These investments are not only a response to current needs, but also a strategic bet on the future.
In their reports, the companies explained how AI influences their business models. Meta and Google reported that AI leads to higher advertising revenue, while Microsoft highlighted demand for its AI tools in the cloud space. Apple plans to introduce an AI-powered version of Siri by 2026, although its hardware sales are already strong.
Investments in AI are huge: according to a Bank of America forecast, AI capital will account for 94% of operating cash flow (net of dividends and buybacks) by 2026. This shows how quickly AI investments are growing. Although the ratio is still below 100%, meaning companies theoretically don’t need to take on debt to finance spending, it is getting dangerously close to that limit.
Interestingly, only Meta was penalized for its spending in AI. The reason for this could be that Meta’s investment to revenue ratio is the lowest among the big seven. Investors who enjoyed Meta’s ‘Year of Efficiency’ in 2023 may feel like CEO Mark Zuckerberg is treating shareholders’ money as his own. However, Zuckerberg could argue that the importance of AI investments is high enough to justify an increase in spending.
The key challenge with AI investing is that it is a very expensive bet with uncertain success. Companies could overbuild capacity without knowing how many data centers are actually needed. When the biggest tech companies overbuild with strong balance sheets and high cash flow, they can simply pause their investments. However, if companies start taking on debt to finance development and demand doesn’t keep up, this could pose a systemic risk.
The bottom line is that companies may be reaching a limit to how much they can use their cash flows to invest in. The question remains whether big technology companies’ AI investments will deliver the expected returns or whether they will prove to be a costly bad investment.
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