AI Spending Surge by Big Tech Spooks Investors, Alphabet Soothes

Key Takeaway

• Meta, Tesla, Alphabet, and Microsoft are ramping up AI investments; Meta's capex could rise by 42%, Alphabet's by 49%.
• Alphabet introduces a dividend of 20 cents/share and a $70bn buyback to reassure investors amid heavy AI spending.
• Investor concerns grow over Meta and Tesla's aggressive AI strategies and their integration into core businesses.

AI Investment Surge

Tech giants Meta, Tesla, Alphabet, and Microsoft are aggressively investing in artificial intelligence (AI), aiming to transcend their current business models. Meta's capital expenditures (capex) are expected to increase by up to 42% this year, with Alphabet forecasting a 49% rise. Microsoft and Tesla have also seen significant capex increases, at 79% and 34% respectively, outpacing their revenue growth. Alphabet's introduction of its first dividend has been interpreted as a maturity marker, contrasting with Meta's share price decline following its announcement of increased AI spending. Investors are seeking tangible returns on these hefty AI investments, with Microsoft showing the most concrete evidence of AI revenue through its range of services and a notable $1.1 billion deal with Coca-Cola.

Dividend as a Confidence Signal

Alphabet's new dividend of 20 cents per share, accompanied by a $70bn buyback program, has been well-received, overshadowing Microsoft's existing dividend payouts. This move is seen as an effort to reassure shareholders amid concerns over Alphabet's AI spending and its impact on the core search business. The dividend announcement aims to placate investors worried about the company's communication on AI breakthroughs and the financial implications of its AI investments.

Meta and Tesla's AI Ambitions

Meta and Tesla's AI strategies are under scrutiny, with their integration into their core businesses of social networking and electric vehicles being questioned. Elon Musk's assertion of Tesla as an AI or robotics company emphasizes the importance of AI in Tesla's future, urging investors to align with this vision. Mark Zuckerberg's ambition to position Meta as a leading AI company reflects a strategic pivot, though the specifics of AI spending and revenue generation remain vague. Meta's projected capex increase to $40 billion highlights the scale of its AI investment, raising concerns about the sustainability of such spending amidst other financial commitments.

Challenges and Opportunities

Meta's AI investment has sparked investor apprehension, contrasting with the optimism surrounding Microsoft and Alphabet's AI ventures. The scale of Meta's AI spending, particularly in the context of its broader investment in the metaverse, has led to a reassessment of its position among Wall Street's favored stocks. Despite Meta's robust operating profit growth, the uncertainty surrounding its AI expenditure and the potential impact on future profitability has tempered investor enthusiasm. The company's efforts to integrate AI into products like Instagram and Facebook aim to enhance user engagement, but the effectiveness of these initiatives remains to be seen.

Street Views

• Analysts at Mizuho (Neutral on Meta):

  "The revelation that the company appears to be in the early stages of a new investment cycle has come as an unwelcome surprise."

Management Quotes

• Elon Musk, CEO of Tesla:

  "We should be thought of as an AI or robotics company . . . if somebody doesn’t believe Tesla is going to solve autonomy, I think they should not be an investor in the company."

• Mark Zuckerberg, CEO of Meta:

  "I actually think we’re in a place where we’ve shown that we can build leading models and be the leading AI company in the world."