Wall Street Thinks AI Capex Is Unsustainable -- Here's Why Big Tech Keeps Spending Anyway
Key Points
Most hyperscaler stocks have pulled back this year.
Amazon, Alphabet, Microsoft, and Meta Platforms will spend around $700 billion in capex this year.
AI is the biggest infrastructure buildout in history.
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There's never been an infrastructure boom like AI.
Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: META) are set to spend around $700 billion this year in capital expenditures this year to build out data centers to support demand for AI applications.
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That's a number that significantly exceeds annual profit for the group, and Wall Street is starting to get nervous. The latest news from Micron, confirming that memory prices have soared, hasn't helped the cause.
Microsoft recently hit a 52-week low, and Meta Platforms is near one. Alphabet and Amazon have fared better, but only the Google parent has matched the S&P 500's return year-to-date.
Image source: Getty Images.
Why the hyperscalers are spending so much
All of these companies, except for Meta Platforms, have large cloud computing businesses that can justify this kind of spending. Amazon, for example, has gone through similar cycles of capex spending across both its cloud infrastructure business, Amazon Web Services, and its e-commerce business.
In the first quarter, AWS's revenue rose 28% to $37.6 billion, and it generated $14.2 billion in operating income.
For a business already making more than $50 billion a year from cloud computing, spending to grow it during the AI boom makes sense. Amazon is competing with Alphabet, Microsoft, and others for cloud customers, and it needs to have the chips, servers, data centers, and computing capacity to serve its customers.
These cloud companies are also responding to demand from end customers as AI adoption grows.
Meta's capex ramp is harder to parse since the company doesn't have a direct way to monetize it. Some of that spending will power its advertising machine, but the company is also focusing on superintelligence, devices like VR headsets and glasses, and the metaverse. CEO Mark Zuckerberg has said that adding a cloud business is an option.
Will it pay off?
The surge in capex spending has sparked concerns about a bubble, but this looks like a rational decision. All four of these companies are hugely profitable and can easily support such a risk. For the cloud businesses, the growth is evident.
However, it will take time to see if these investments pay off across the cycle. These companies don't need them to be successful, but all four are trading at very reasonable valuations. If the capex boom delivers results sooner than expected, all four of these stocks have room to make significant gains.
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Jeremy Bowman has positions in Amazon, Meta Platforms, and Micron Technology. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, Micron Technology, and Microsoft. The Motley Fool has a disclosure policy.
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