Big Tech’s $200B AI bet raises questions about market bubble risks

Microsoft, Meta, and Google reported record profits alongside massive increases in AI infrastructure spending, with combined capital expenditures reaching unprecedented levels as the companies bet heavily on artificial intelligence’s future. The surge in spending—Meta alone increasing its forecast to up to $72 billion this year—is fueling growing concerns among analysts about whether the AI market represents a dangerous bubble that could eventually burst.

What you should know: All three tech giants dramatically increased their AI spending forecasts while reporting strong revenue growth in their latest quarterly earnings.

• Meta raised its 2024 capital expenditure forecast to $70-72 billion, up from a previous range of $66-72 billion, with CFO Susan Li warning next year’s spending would be “notably larger.”
• Google’s parent Alphabet expects 2025 capital expenditures of $91-93 billion, a significant jump from its earlier $75 billion estimate.
• Microsoft’s capital expenditures hit $34.9 billion this quarter, nearly $5 billion more than forecasted and a 74% increase year-over-year.

The big picture: Tech companies are making these ambitious spending commitments under the assumption that AI demand will continue growing exponentially, but some analysts worry about bubble-like conditions.

• OpenAI, the company behind ChatGPT, announced plans yesterday to develop 30 gigawatts of computing resources worth $1.4 trillion.
• Nvidia, the chip giant, said last month it would invest “up to $100 billion” in OpenAI, provided the company builds at least 10 gigawatts of AI centers using Nvidia chips.
• Microsoft took a $3.1 billion hit in net income this quarter due to losses from its $13 billion OpenAI investment.

Revenue justifies the spending: Despite massive infrastructure costs, all three companies reported strong financial performance that supports their AI investments.

• Meta generated $51.24 billion in revenue last quarter, up 26% year-over-year, while assuring investors that AI was already benefiting its advertising and virtual reality businesses.
• Alphabet earned a record $102.3 billion in Q3, up 33% from last year, with its cloud business growing 35% to $15.15 billion.
• Microsoft reported $77 billion in quarterly revenue, up 18% year-over-year, with cloud business revenue increasing 26%.

What they’re saying: Company leaders defend their aggressive spending strategies while acknowledging the risks involved.

• “There’s a range of timelines for when people think that we’re going to get superintelligence,” Zuckerberg said. “I think that it’s the right strategy to aggressively front-load building capacity, so that way we’re prepared for the most optimistic cases.”
• Microsoft CEO Satya Nadella emphasized the company’s approach: “It’s not like we buy one version of Nvidia and load up for all the gigawatts we have. Each year, you buy, you ride Moore’s Law, you continually modernize and depreciate it, and you use software to grow efficiency.”
• Mark Moerdler from Bernstein, a financial research firm, noted Microsoft is “building capacity in tranches over time and can shift resources, which gives them a lot of protection,” but added: “Is there an overall AI bubble? [It’s] possible, and that they did not answer.”

Competitive dynamics: The spending race reflects intense competition for AI talent and infrastructure, with companies making dramatic organizational changes.

• Meta has offered some AI researchers compensation packages worth hundreds of millions of dollars while cutting 600 jobs last week to make AI teams more efficient.
• Google’s Gemini AI app now has 650 million monthly active users, up from 450 million last quarter, though still trailing ChatGPT’s 800 million weekly users.
• Microsoft is making its data center fleet “fungible” or interchangeable to adapt to changing customer demands while expecting to “continually modernize” its infrastructure.