AI Costs in Focus Ahead of Tech Earnings After Meta’s Q1 Debacle

Meta’s (META) plan to increase spending on artificial intelligence (AI) unnerved the market, with shares down more than 10% on Thursday. And that has put a spotlight on higher AI costs for other big tech players, especially Microsoft (MSFT) and Alphabet (GOOG) (GOOGL), which report earnings after the bell today.

Wedbush’s Dan Ives said investors should definitely expect other tech companies in similar positions to report increasing costs because of AI.

“It’s a high class problem with the AI Revolution and this arms race,” Ives said.

Big Tech’s AI Spending

According to analysts at Raymond James, “AI inflation” is driving up capital expenditures (capex) for big tech, with Amazon (AMZN), Meta, Microsoft, Alphabet and Oracle (ORCL) expected to spend $199 billion on capex this year, about 28% more than in 2023.

Mircosoft’s updates on AI during this evening’s earnings presentation will be closely watched by investors and analysts alike. The company “is ramping capex in order to serve future AI workloads,” Jefferies analysts led by Brent Thill wrote in an April 24 note. They added that Microsoft was “still in the early innings of this Capex build out for AI.”

Jefferies analysts had labeled Microsoft as a big AI winner, in a note end of March, and had picked Alphabet as the most underrated AI bet. Even though AI is seen as a threat to Google’s core search business, the company is “best-positioned to benefit from the consumer opportunity by introducing Gen AI to its billions of users,” analysts had said at the time.

As for Meta, while its AI spending plans caught investors off-guard, analysts say there should be a payoff.

“What is different on this investment cycle is that AI investments are already driving business results, and the Street is constructive on the AI opportunity but CEO’s change in tone was noteworthy,” Bank of America analysts said about Meta in a note. These investments can also drive double-digit ad growth for Meta through 2025, they said. 

Sticker Shock Now, Reward Later?

“The key takeaway is that AI will undeniably be positive over the long-term, but the upfront cost is enormous – not just for Meta, but for all companies,” said Mark Hackett, Chief of Investment Research at Nationwide in a message to Investopedia.

However, a sticker stock on AI spending amid disappointing economic data like the GDP report this morning, could further slow down earnings and reset valuation expectations for tech stocks.

“This reflects the substantially optimistic assumptions that were built into the market (particularly technology) and reinforces our belief that we are likely in for a period of sideways volatility as we grow into valuations, investor expectations are reset, and inflation trends lower,” said Hackett.

Any weakness in tech stocks because of AI spending is a “golden buying opportunity,” Wedbush’s Ives said in a message to Investopedia.