Tech earnings season is in full swing, and while a handful of notable players still need to report, namely Apple (AAPL) and Nvidia (NVDA), there’s one key throughline running through the announcements so far: It’s taking a lot of money to make money on AI.
Amazon (AMZN), Google (GOOG, GOOGL), Meta (META), and Microsoft (MSFT), four of tech’s biggest AI players, have each called out AI sales growth, though without many specifics, while pointing to increased spending on capital expenditures to meet AI demand.
Microsoft announced last week it spent $14 billion on capital expenditures tied to its AI buildout in its fiscal third quarter, up from $7.8 billion in the same period last year. The company’s 2024 capital expenditures have already eclipsed its spending across all of 2023, and there’s still another quarter left in its fiscal year.
Google parent Alphabet said it spent $12 billion in the last quarter and will continue at that pace for the rest of the year. Meta similarly said it’s cranking up spending for the full year from $30 billion-$37 billion to $35 billion-$40 billion. And CFO Susan Li said that number will increase in the year ahead as well.
And on Tuesday, Amazon said it would blow past last year’s $48.4 billion in capital expenditures, saying the $14 billion it spent in Q1 will be the low for the year.
Those are mountains of cash. And while there are early signs that AI is driving revenue growth, it’ll take time before it truly makes an impact on companies’ bottom lines.
“I'm thinking it's a 12- to 18-month investment period before we start to see a lot of this really pay off big time,” TECHnalysis founder and chief analyst Bob O’Donnell told Yahoo Finance.
Testing the AI waters
Generative AI is still a relatively new technology. Sure, it blew up in 2023, but corporations are slow-moving entities, and many are only starting to try out generative AI applications across their business segments.
“If I sign up for Microsoft 365 with Microsoft, do I sign up all of my 100,000 employees or do I sign up 500 to check it out?” O’Donnell asked, adding that companies are starting out with a smaller number of signups to get a sense of how they can best use AI applications on the job before signing up the rest of their employees.
That’s not necessarily a bad thing for tech companies. During its earnings call last week, Microsoft said AI accounted for 7 percentage points of revenue growth in its Azure and other cloud services business. That was up from 6 percentage points in the prior quarter and 3 percentage points in the quarter before that. In Q4 last year, the company said AI drove 1 percentage point of growth in Azure.
And while it might seem like growth is falling off precipitously, Microsoft CFO Amy Hood said it was more the result of a lack of available AI capacity. In other words, Microsoft didn’t have the resources needed to meet customer demand.
Google CFO Ruth Porat noted a similar increase in AI sales during her company’s earnings call, saying that Google’s Cloud Platform saw increasing revenue contributions from AI, though she didn’t provide an exact number.
For Amazon’s part, CFO Brian Olsavsky said customers continue to sign up for larger and longer deal commitments for Amazon Web Services, with many adding generative AI components.
Spending won’t slow down anytime soon
It might take a year or more to start seeing AI-based revenue growth truly take off, but that doesn’t mean companies are going to ease up on spending. According to Forrester analyst Rowan Curran, companies have been pouring money into AI technologies for years; generative AI has just supercharged that spending.
“We saw a huge growth and investment over the past … year and 18 months, but this has been a continuous increase over the past, I would say, eight or 10 years,” he said.
And tech companies are preparing investors for the long road ahead. During Meta’s earnings call last week, CEO Mark Zuckerberg tried to assuage concerns that the social media giant will need to plow cash into its AI efforts, though it largely fell on deaf ears, as shares tumbled 14% the morning after the announcement.
Hood, meanwhile, said that Microsoft will continue to push AI spending, with levels likely to be the same as those in the company’s fiscal 2025 as they’ve been throughout its fiscal 2024.
Olsavsky offered a similar outlook for Amazon, saying that the company will plow money into generative AI services.
“We will be meaningfully stepping up our capex, and the majority of that will be … to support AWS infrastructure and specifically generative AI efforts,” he said during the company’s earnings call.
Now companies just have to prove all of that spending is paying off and provide the numbers to match.
Email Daniel Howley at [email protected]. Follow him on Twitter at @DanielHowley.
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