Microsoft, Meta, Amazon and Big Tech’s AI Consumption Problem

For tech’s biggest players, this earnings season is starting to feel like a scene from the movie Jerry Maguire – and the “show me the money” demands don’t work any better than they did for Tom Cruise. Some analysts even dub this the “show me the money” quarter.as Wall Street’s patience with massive AI spending starting to get thin.

ONE tech stock sale elaborated on Thursday as investors confronted the rising costs of Silicon Valley’s artificial intelligence ambitions. Microsoft (MSFT) stock fell 6% and Facebook parent Meta (META) fell 4% after the companies reported earnings late Wednesday. And in after-hours trading Thursday following their own earnings announcements, Amazon (AMZN) stock fell more than 3% and Apple (AAPL) fell 2% – despite all four companies reporting strong quarterly surplus. (Some of the shares were rebounding in pre-market trading on Friday.)

Almost two years after ChatGPT started Silicon Valley’s AI gold rushthis week’s tech earnings revealed both the promise and the staggering price of the AI ​​revolution. While companies reported significant gains from AI initiatives — Meta’s ad rates rose 11%, Google Cloud revenue increased 35% to DKK 11.4 billion. Amazon’s AWS is growing 19% to $27.5 billion – their warnings about future spending triggered a broad market pullback.

Meta expects capital expenditure of up to $40 billion next year, Microsoft warned of ongoing OpenAI losses and slow cloud growthand even Apple, taking its first cautious steps into AI with its Rollout of Apple Intelligence this week saw investors retreat – despite record revenue of DKK 94.9 billion.

Tech executives’ unwavering faith in AI’s potential stands in stark contrast to investors’ growing anxiety about its costs.

“First, it’s clear that there are a lot of new opportunities to use new AI advances to accelerate our core business, which should have a strong ROI over the next few years,” Meta CEO Mark Zuckerberg told investors .

Amazon CEO Andy Jassy struck a similar note: “I think we’ve proven over time that we can drive enough operating income and free cash flow to make this a very successful return on invested capital. We expect that the same will happen here with generative AI.”

Microsoft CEO Satya Nadella emphasized “AI-powered transformation.” And earlier this week, Google (GOOGLE) chief Sundar Pichai highlighted “extraordinary momentum.”

But while tech leaders talk confidently about long-term returns, the market is increasingly focused on the short-term price of these ambitious visions. Rising infrastructure costs, combined with uncertain timetables for returns, are testing investors’ patience with Silicon Valley’s spend-now-profit-later approach to innovation.

Microsoft shares fell more than 6% on Thursday after executives predicted Azure’s growth would slow and warned of weaker expansion in its AI-powered cloud business. The guide suggested that even for Microsoft, which has emerged as an early AI leader through its partnership with ChatGPT maker OpenAI, the road to AI profits may be longer and more expensive than investors hoped.

“AI-driven transformation is changing work, work artifacts and workflows across every role, function and business process,” said Nadella, whose company saw total revenue rise 16% to $65.6 billion. Microsoft’s overall cloud revenue rose 22% to $38.9 billion, but the company expects growth in its intelligent cloud segment to slow to 18-20% next quarter.

At Google parent Alphabet, Pichai pointed to new AI capabilities in Search and Cloud as key growth drivers helping push revenue up 15% to $88.3 billion. Google Cloud’s profit rose to $1.9 billion from $266 million a year earlier, suggesting the company is finding ways to monetize its AI investments.

Meta leveraged AI to revitalize its core advertising business, with revenue up 19% to $40.6 billion. The company expected fourth-quarter revenue of between $45 billion and $48 billion, which is above analysts’ expectations. But CFO Susan Li warned of a “significant acceleration in infrastructure spending growth next year” due to the “back-end-weighted nature” of 2024 investment and expansion of AI infrastructure.

The massive spending plans highlight how AI’s transformation of the tech industry remains in its early stages. While the technology is starting to deliver measurable business results, tech giants are betting billions that the real payoff is still ahead — and are asking investors to be patient. Goldman Sachs (GS) have recently expressed concern that while AI has the potential for significant efficiency gains in certain areas, the high costs associated with developing and maintaining AI systems may outweigh the benefits in many cases—potentially making it more expensive than simply hiring human employees to specific tasks.

With robust cash positions and strong core businesses, these companies appear to be able to sustain their AI investments even as costs rise. But the market reaction to Microsoft’s and Meta’s warnings serves as a reminder that even for the tech’s strongest players, the AI ​​revolution is proving to be an increasingly expensive proposition with an uncertain timeline for returns.

Like Jerry Maguire’s demanding client in the 1996 film, Wall Street’s message to Silicon Valley is becoming clearer every day. As a Bank of America (BAC) report says: “We expect artificial intelligence to move from a ‘tell me’ to a ‘show me’ story, where any disconnect between investment and monetization will come under increased scrutiny.”