Financial markets are abuzz over the plans of top technology companies to spend hundreds of billions of dollars this year on infrastructure for artificial intelligence.
Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT) and Meta Platforms (NASDAQ: META) announced in recent days that they will devote up to $670 billion combined on capital expenditure this year. That will go mostly to developing data centers, which will be utilized for AI functions.
The breakdown is $200 billion for Amazon, $185 billion for Alphabet, $150 billion for Microsoft and $135 billion for Meta.
These are astounding numbers. The combined total represents 2.1% of U.S. GDP. That’s the second biggest ratio for a capital spending project in U.S. history, according to The Wall Street Journal. The 1803 Louisiana purchase, which doubled the nation’s size, took first at 3% of GDP.
The question for investors now is whether all this spending is a good thing for the tech giants. Almost everyone agrees that AI will be revolutionary for society. But it’s unclear how profitable this will be for the four biggies above. They may earn billions and billions of profit from the AI wave over the long term, however that’s no slam dunk.
Cash flow shock
One thing that is certain: the companies’ cash flow will take a hit this year. That already started last year, when free cash flow for the Big 4 registered $200 billion, down from $237 billion in 2024.
Analysts say Amazon could post negative free cash flow this year of about $23 billion, according to CNBC. Pivotal Research predicts Alphabet’s free cash flow will plunge almost 90% this year to $8.2 billion. Meta could see a drop of 90% as well, Barclays analysts say.
The outlook is better for Microsoft: a decline of 28%, Barclays estimates, according to CNBC. Microsoft could fare better because it has so many products generating big cash flow, such as Office 365, Windows, and Azure.
Debtors prison?
Another negative of the heavy capex is that it will likely require the companies to take on debt and issue more equity. Already, Alphabet sold almost $32 billion of bonds in less than 24 hours this week.
Demand was voracious for the paper. It included the tech industry’s first 100-year bonds since 1997, the heart of the dot-com boom, according to Bloomberg. Investors’ appetite could be strong for bonds from the other tech giants too, given their strong finances up to this point.
But in the stock market, investors have given the tech stalwarts’ spending plans a thumbs-down for the most part. Since Jan. 27, before the capex news, Microsoft stock has dropped 11%, Amazon 12%, and Alphabet 4%. Meta has climbed 0.5%.
None of this predicts the future, of course. AI could be a source of raging profits for the Big 4, ultimately making the spending look trivial. The companies obviously have a history of huge financial success. So what happens from here is anyone’s guess.
The author owns shares of the four companies.
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