Big Tech’s $750B AI Gamble Hits Strain Amid Slowing Growth
The primary operations of America’s technology behemoths – the advertising, consumer, and retail sectors supporting a combined $750 billion in AI expenditures this year – are beginning to exhibit indications of deceleration. In certain instances, they are being undermined by the very technology on which the firms are placing their substantial investments. Earlier this week, Alphabet Inc., the parent company of Google, disclosed that advertising revenue from search and other avenues – a segment that constitutes approximately fifty percent of total revenue – experienced its slowest growth rate in five quarters. Yet the company upheld a capital expenditure forecast of up to $205 billion for this year. Amazon.com Inc. announced on Thursday that the expansion of its primary ecommerce powerhouse and advertising sector experienced a deceleration in the previous quarter, while reaffirming its strategy for approximately $220 billion in capital expenditures for the year.
Microsoft Corp. and Meta Platforms Inc. both upheld their spending guidance, yet their results fell short of investor expectations. The earnings reports and the subsequent stock selloffs reveal the intensifying tensions surrounding the transition of major technology firms to new AI-driven products, along with the financial investments necessary to achieve this shift. The companies have been issuing unprecedented levels of debt, selling equity, signing multibillion-dollar data center deals, and taking on trillions of dollars in future obligations to finance a global expansion of AI infrastructure. Throughout this period, the introduction of new products has been diminishing profitability and diverting focus from certain legacy offerings. Investor patience is diminishing. Alphabet’s shares experienced a significant decline on Thursday, resulting in a loss of nearly $500 billion in market value. Amazon’s shares experienced a decline of 7% during late trading. Meta has experienced a decline of 10% following its earnings report last week, during which it informed investors of its intention to increase its investments in AI. However, the company cautioned that the new agentic AI application, Muse, is demonstrating significant demands on computing resources.
The market is pondering the question: “how does all this pay off?” Dan Morgan commented on Alphabet’s earnings. Even Microsoft, which reported strong growth in its cloud business and kept spending in check, couldn’t avoid the fallout. The company’s shares initially surged following the report that sales at Azure, the closely monitored cloud computing division, increased by 48% to $33.2 billion during the quarter ending in September. By the time markets closed on Thursday, the stock had erased all gains and was down 0.2%. Amazon’s results exhibited greater complexity. The company had shifted its annual Prime Day from the third quarter last year to the second quarter this year, which explained some of the slowdown. However, analysts had previously revised their projections accordingly, yet the outcomes still fell short. The commerce giant’s advertising services unit experienced an 11% growth, marking the slowest rate since Amazon initially categorised it as a distinct segment in 2022. And the online stores business grew by just 2%, a level not seen in more than three years when people resumed pre-pandemic spending habits and online shopping cooled.
Those results eclipsed the expansion of Amazon’s cloud-computing division and fuelled investors’ scepticism regarding its bold investments in AI. Cloud computing was also a bright spot for Google. The sales of the cloud division experienced a more than twofold increase compared to the previous year. Operating income more than tripled. The unit’s chief executive officer, Thomas Kurian, joined the earnings call for the first time, signaling the business’ importance to Google going forward. But investors were more fixated on the cracks emerging within Google Search, which remains the lifeblood of the company. To stay relevant as chatbots such as ChatGPT become more popular, Google has woven more AI into the search engine, including a dedicated tab called AI Mode. But the growing popularity of that feature has hurt the profitability of Google Search. Chief Business Officer Philipp Schindler acknowledged on Wednesday that the firm is experiencing “lower monetization” for queries with AI Mode, an admission that resulted in a further decline in its stock. Schindler said the company is working to bring more ads to AI Mode and is optimistic about the product’s trajectory.
Google has struggled this year to keep up in the AI race against startups Anthropic and OpenAI. If the company can regain footing on AI model development, it will likely resume delivering the returns that investors have come to expect, said Mandeep Singh. “With all these transitions, sometimes we get too fixated on the cash cow business,” Singh said. “Given how Cloud has been expanding margins, I feel a combination of the cloud business and search, once they are at the frontier, would take their profitability back to where they were.” Gene Munster, managing partner of Deepwater Asset Management, noted that it is also common for new ad formats to launch with lower margins that gradually increase over time, in reference to Google’s lower AI Mode monetisation. The firm’s larger challenge lies in developing agents capable of executing purchases on behalf of users while retaining a portion of those transactions – a business model that many in Silicon Valley consider attainable following the success of Meta’s Muse personal assistant. “The old way of doing it was blue links or display advertising to influence consumer behavior,” Munster said. “The new way is how do you influence the bot.”
