Many investors are familiar with the “huge” capital expenditures (capex) of the largest US technology companies (often called Big Tech).
But changes to Big Tech’s business raise serious questions about whether the expected return on the latest investments will be the same as before.
After growing 32% in 2020, the investments of the Alphabet team (including: Amazon, Apple, Meta and Microsoft) rebounded in 2021, reaching $140 billion. This indicator continued to increase by 20% in the first 9 months of 2022.
Such large spending rounds of leading technology companies are often recognized. One of the reasons is the need to prepare resources for the new stage of development.
New data centers, larger offices or (in the case of Amazon), warehouses and delivery trucks all need to be up and running ahead of time.
The surprisingly strong growth that the big tech companies have sustained in recent years – especially during the pandemic – has partly vindicated their confidence.
However, Big Tech does not always choose the right time.
When the Big Tech is ‘violent’
Amazon began ramping up spending not long before Andy Jassy took over as its chief executive officer (CEO) in mid-2021.
Amazon’s capital disbursement reached $61 billion last year, a huge jump from $17 billion just two years earlier.
When growth slowed earlier this year, Amazon somewhat realized they had ‘stepped on the gas’ too much.
As the economy slows down, risks increase – especially as some corners of the digital economy are showing signs of slowing down.
Big Tech’s latest earnings reports and forecasts indicate that e-commerce and digital advertising have unexpectedly decelerated as consumer demand slows.
Now that it’s taking on a larger role in the economy, it’s no longer so easy for tech companies to stay out of macroeconomic developments.
Meanwhile, even if demand for some services doesn’t fall, a weakening economy is making customers less willing to pay higher prices.
This led to slower-than-expected growth in Amazon and Microsoft’s cloud businesses in the latest quarter.
Both companies say customers have “optimized” spending in the cloud. That is, customers are switching to cheaper data storage plans or running their workloads on cheaper chips.
However, the need for more computing power is growing exponentially.
Big Tech’s AI race
The rise of cloud computing, and the recent push to advance artificial intelligence (AI) capabilities, has brought about a step change in Big Tech’s capital spending.
Meta, which disappointed Wall Street last week with plans to ramp up spending on Metaverse, also said that demand for AI is creating a huge jump in capital spending.
From 16% in 2021, Meta’s investment is expected to hit 28% of revenue this year, before hitting 30% in 2023. Changes on this scale have raised concerns on Wall Street that the capital requirements for Big Tech’s business are changing.
Amazon’s share of revenue spend has grown from about 5% in 2016-2019 to over 12% in both 2021 and the first nine months of 2022. New technology, primarily to support the expansion of Services Amazon’s Web has caused much of this.
A push into cloud computing and advertising (another technology-driven business) has boosted Amazon’s margins.
However, the possible return from the majority of Big Tech’s spending is increasingly difficult to predict. Recent efforts by customers to reduce their cloud bills suggest that tech companies will likely face price pressure as the cloud becomes a larger part of the total. Information Technology.
It’s unclear whether the improvements AI will bring to existing services – or the entirely new services it will create – will generate enough new revenue to cover the costs.
Meta says AI will help it analyze all of the content passing through its network so it can bring the most relevant images or videos in front of each user, while also targeting its ads more precisely. The effectiveness of this has not been proven.
In some cases, AI even becomes the product. Innovative AI systems that generate text or images on command have fueled the latest race in the AI world to create increasingly complex – and more expensive – models.
It’s hard to say how costly this arms race will become, or how profitable it will be. But even if it falls into a recession, Big Tech won’t give up on spending.
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