This year, investing 200 billion, and increasing next year! The third quarter report reveals the big bets on AI by the four tech giants in Silicon Valley

The third-quarter financial reports released this week tell us one big thing: no matter how disproportionate the current returns are compared to the investments, the four tech giants—Microsoft, Google's parent company Alphabet, Amazon, and Meta—will not slow down their bets on artificial intelligence (AI) and may even increase their investments next year.

According to Bloomberg, the total capital expenditure of these four internet and software companies will exceed $200 billion this year, a record number. Moreover, executives from each of these companies warned investors this week that they will continue to invest heavily next year, with expenditures potentially increasing.

An earlier article from Wall Street Journal mentioned that in the third quarter, tech giants continued to follow the "increase spending" narrative on AI and promised to continue increasing expenditures on servers and other AI-related costs in the coming quarters. Among them:

• Microsoft's capital expenditure in the third quarter increased by 50% year-on-year to $15 billion, with fourth-quarter expenditures expected to grow by 32% year-on-year, and FY2024 expenditures expected to grow by over 55%, mainly driven by aggressive AI investments and general server replenishment.
• Alphabet's capital expenditure in the third quarter increased by 62% year-on-year to $13 billion, with fourth-quarter expenditures expected to be similar to the third quarter, and expenditures next year will "significantly" increase, mainly driven by AI infrastructure investments;
• Amazon's real estate and equipment expenditures in the third quarter increased by 81% year-on-year to $22.6 billion, with this year's capital expenditure expected to reach a record $75 billion, a 55% increase from last year, driven by the AWS cloud division, and capital expenditures next year may be even higher.
• Meta's capital expenditure in the third quarter increased by 26% year-on-year to $8.3 billion, with the guidance range for this year's total capital expenditure still at the high end of $40 billion and the low end raised by $1 billion to $38 billion, thus the midpoint of the guidance range's year-on-year growth rate rises to 43%, with expenditures mainly driven by AI infrastructure investments. Meta also reiterated that it will significantly increase capital expenditures on AI infrastructure next year.

The massive investments by Silicon Valley giants in AI highlight the enormous costs and resources consumed by the global AI craze to acquire scarce high-end chips and build the vast data centers required for AI technology. Bloomberg reported that these giants are also trying to convince Wall Street that these huge investments will make their future businesses more profitable than their existing businesses of selling digital ads, goods, and software.

During the earnings call on Wednesday, Meta CEO Mark Zuckerberg promised to increase investments in AI language models and other future projects, making these projects the core of the company's future. He said:

"First of all, there are clearly many new opportunities to leverage new AI advancements to accelerate our core business, which should have a high return on investment (ROI) in the coming years." The next day, during Amazon's earnings call, CEO Andy Jassy stated that AI is a "truly special and perhaps once-in-a-lifetime opportunity." He said:

"I believe we have demonstrated that over time, we can generate sufficient revenue and free cash flow to make this a very successful business in terms of investment returns. We expect the same to happen with generative AI."

He also mentioned, "I think our customers, businesses, and shareholders will be satisfied with this because we are actively pursuing this goal."

It is worth noting that although there have been and will be large-scale expenditures related to AI, the stock performance of the four giants varies. On the first trading day after the earnings reports were released, Alphabet and Amazon's stock prices rose, with the former closing up nearly 3% and the latter rising over 6% during Friday's trading session, while Microsoft and Meta fell more than 6% and 4%, respectively.

Some commentators believe this is due to the strong growth in the cloud computing sector, which led to better-than-expected earnings for both Alphabet and Amazon, while Microsoft's cloud revenue growth outlook was disappointing, and Meta's spending plans raised market concerns.

A previous article from Wall Street Insight mentioned that Microsoft's Azure cloud computing revenue growth slightly slowed in the third quarter, with expectations for a more significant slowdown in the fourth quarter. Microsoft's executives stated that the slowdown in Azure growth is not related to weakened customer demand, but rather that the company has not been able to roll out new AI servers as quickly as anticipated.

In other words, the issue is not a lack of customer demand, but rather Microsoft's inability to build capacity quickly enough. Microsoft CEO Nadella commented during the earnings call, "This demand has emerged quite rapidly," and added that data centers "are not built overnight."

Wall Street analysts are generally optimistic about Microsoft's prospects in addressing data center supply challenges. Analysts at JP Morgan believe that this issue will "moderately" limit Microsoft's cloud business, but Microsoft's investments, especially its significant stake in OpenAI, are "planting the seeds for long-term success."

For Meta, Wall Street remains concerned about uncontrolled spending. Emarketer's chief analyst Jasmine Enberg stated that investors will still be nervous about any signs of weakness in Meta's advertising business, "because they are still waiting for the returns on Meta's larger AI bets."

In the third quarter, Meta's metaverse-related division, Reality Labs, recorded an operating loss of $4.43 billion. This division's virtual reality (VR) and augmented reality (AR) devices have not yet achieved commercial success, and Meta has also invested in developing the AI model Llama. Zuckerberg argued during the earnings call that the company's AI investments are improving the core business of selling ads on Facebook and Instagram.

Some analysts believe that Zuckerberg's massive spending will ultimately pay off. For instance, analysts at MoffettNathanson wrote in a report, "History is on his side. Investors have now been trained to know that patience is a virtue." Compared to the aforementioned four giants, although Apple has also committed to investing in AI and launched its own AI system, Apple Intelligence, its third-quarter performance did not receive much help from new AI products due to the timing of their release.

A previous article from Wall Street Insights summarized that in terms of capital returns from AI, there were some positive growth signs in the conversational AI services of tech giants in the third quarter, but this growth does not seem to have met expectations and may be offset by a slowdown in spending in other areas, limiting overall company growth. Shareholders will have to wait longer to know the specific return answers