As Big Tech Ramps Up AI Spending, Investors Worry Whether AI Costs Will Pay Off

As big technology companies including Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META), and Amazon (AMZN) boost capital expenditures on artificial intelligence (AI), some investors and experts have raised concerns about whether potential payoffs from AI will be worth the price.

However, AI optimists say the big capital expenditures are likely to pay off—and even they don’t, they’ll amount to a mere blip for the biggest tech players.

Big Tech To Spend $1 Trillion on AI in Coming Years

Goldman Sachs analysts project that big tech companies are set to collectively spend over $1 trillion on artificial intelligence over the next five years.

Capital Group analysts forecast capital expenditures spending from tech giants Microsoft, Alphabet, Meta, and Amazon totaling $189 billion in 2024, making up more than a fifth (21%) of total capital expenditures among companies in the S&P 500 Index.

Microsoft, Alphabet, Meta, and Amazon have all told investors they expect increased spending on AI infrastructure, specifically data centers, to secure their long-term position in the AI space and meet the computing demands of the technology. Big tech investing in AI infrastructure now helps ensure they have access to the computing tech needed as AI tech advances.

They can invest in AI because they are well-capitalized. “Larger technology companies can absorb the costs of building these large language models, afford some of these computing costs,” said Goldman Sachs analyst Eric Sheridan.

“Revenues and earnings have been robust for the large tech firms, supported by high cash flows, enabling them to meaningfully increase their capex,” which they are pouring into AI, Capital Group analysts said.

The AI Payoff May Be Far Away and Could Disappoint

Despite the chatter that AI could transform the workforce and catalyze economic growth, analysts caution that current AI spending likely won’t come to fruition anytime soon.

“Given the focus and architecture of generative AI technology today … truly transformative changes won’t happen quickly and few—if any—will likely occur within the next 10 years,” Daron Acemoglu, an economist and professor at Massachusetts Institute of Technology (MIT), told Goldman Sachs researchers.

Acemoglu estimates that a quarter of “AI-exposed tasks” will be cost-effective to automate over the next decade, implying little economic benefit for the less than 5% of tasks that AI can impact.

Even once realized, the outcome of big tech’s AI investments may still fall short of the hype. “AI technology is exceptionally expensive, and to justify those costs, the technology must be able to solve complex problems, which it isn’t designed to do,” said Goldman Sachs’ Global Equity Research Head Jim Covello.

Risks From Big Tech’s Massive Spending Could Be Limited

Analysts explained that while there are concerns about the capabilities of the technology and the scale of big tech’s spending, these companies are unlikely to experience significant downsides to AI investments.

The “AI cycle is still very much in the infrastructure buildout phase,” so it’s reasonable that a “killer application” capable of solving complex problems has yet to emerge, Goldman equity analyst Kash Rangan said, suggesting that more advanced capabilities are to come for the tech.

Goldman analysts also highlighted that big tech’s current spending is “not materially different” than past investment cycles in the industry’s history.

“Spending is certainly high today in absolute dollar terms,” according to Rangan, who said the current cycle seems more promising than previous ones because of big tech companies’ involvement.

“Incumbents have access to deep pools of capital, an extremely low cost of capital, and massive distribution networks and customer bases,” which “lowers the risk that technology doesn’t become mainstream.”

The analysts said that these companies are under substantial pressure from shareholders over their increased spending to ensure that AI investments lead to higher revenue.

Bernstein analysts said that even if the outcome of the big tech’s AI spending falls short of expectations, the risks associated with the investment are limited since the companies can use the computing power intended for AI for other workloads if needed. 

Despite any investor concerns about big tech companies’ increased spending, Microsoft, Alphabet, Meta, and Amazon shares have outpaced major indexes year-to-date.