Big Tech investors are preparing for a critical test as Alphabet, Microsoft, Meta and Amazon report quarterly results on Wednesday, with the four companies on track to pour around $600 billion into AI this year - a historic outlay that has squeezed cash flows and tested Wall Street's patience. According to Reuters, investors are demanding answers about whether the sky-high spending on AI has driven enough growth in cloud computing and advertising to justify the massive capital expenditure. Amazon and Instagram-parent Meta have announced job cuts affecting thousands of workers, while Microsoft has come up with its first employee buyout program in more than five decades. As Joe Maginot, large-cap portfolio manager at Madison Investments, which holds shares in Alphabet, Meta and Amazon, noted: 'What investors are looking for – us included – is what's the return on all the capital expenditure?'
OpenAI has fallen short of its goals for new users and revenue in recent months, sparking concerns among company leaders over whether it can support its extensive data-center spending, according to the Wall Street Journal. The ChatGPT creator missed multiple monthly revenue targets earlier this year after losing ground to Anthropic in coding and enterprise markets. CFO Sarah Friar has expressed concerns to other company leaders that the ChatGPT creator might not be able to pay for future computing contracts if revenue doesn't grow fast enough, as reported by the Wall Street Journal. ChatGPT's growth slowed toward the end of last year, with the company falling short of an internal target to reach 1 billion weekly active users for the artificial intelligence chatbot by year-end. The company has also grappled with subscriber defections, adding to the mounting pressure on the AI leader as it races toward its IPO.
Growth is expected to accelerate modestly across the cloud sector in the January-to-March quarter, with Amazon Web Services likely growing 25%, Microsoft Azure expected to have risen 40% and Google Cloud 50.1%, compared with 23.6%, 39% and 47.8% respectively in the prior quarter, according to data from Visible Alpha and LSEG. Overall revenue growth remains robust as Alphabet's sales are expected to rise 18.7% to $107.06 billion, while Amazon is expected to increase 13.9% to $177.30 billion and Microsoft by 16.2% to $81.39 billion. Meta will likely post a 31% sales jump to $55.45 billion, its fastest growth in more than four years, as its AI bets improve ad targeting and reach.
The S&P 500 software and services index has dropped about 17% so far this year, broadly driven by fears that new AI tools could hurt future revenue growth and profit margins. Investor concerns around AI disruption have been building since Anthropic launched new tools that automate tasks across areas such as marketing and data analytics, raising questions about the pressure such products could put on traditional software providers. According to Goldman Sachs, the big four cloud companies are set to spend around $600 billion on AI this year, a historic outlay that has squeezed cash flows and tested Wall Street's patience, even as their stocks have largely held up on expectations of future gains. Hussman notes that corporate America has seen profits explode, largely driven by bullishness around AI and mega-deals in the tech sector, but warns this growth is largely being fueled by deficits in other areas of the economy.
The stakes are especially high for Microsoft as its stock has lagged rivals and ended the January-March period with its worst quarterly performance since the 2008 financial crisis, while other Big Tech companies posted gains. Once seen as the early leader of the AI race, investors fear Microsoft has failed to convert its vast clientele of business customers into paying Copilot users, with only 3.3% of its more than 450 million enterprise customers subscribing to the $30 a month AI assistant. Microsoft is attempting to turn that threat into advantage by weaving rival AI models deeper into its own ecosystem, but its landmark tie-up with OpenAI has lost exclusivity. While the Satya Nadella-led company will receive a guaranteed 20% cut of OpenAI's revenue through 2030 under a new agreement, OpenAI is now free to work with competing cloud providers such as Amazon.
The warning comes as debt levels across the economy reach concerning new heights. The total federal debt recently swelled to over $38 trillion according to the Treasury Department, but households and companies are also racking up significant debt. Hussman argues that when including debt held by households and foreign trading partners, corporate free cash flow is an 'exact mirror image' of deficits, suggesting that profits in the corporate sector are largely being fueled by deficits in other areas of the economy. He believes the government's pullback on fiscal support could serve as a trigger that pops the bubble, as he doesn't believe technological advances contribute to net economic growth, with the financial impact of new tech 'primarily to widen income disparities'. Hussman speculates that if the US moves back to fiscal stability, corporate profit margins will also retreat from their current extremes.
