For tech’s biggest players, this earnings season is starting to feel like a scene from the movie Jerry Maguire — and the “show me the money” demands aren’t working out any better than they did for Tom Cruise. Some analysts are even dubbing this the “show me the money” quarter, as Wall Street’s patience with massive AI spending begins to wear thin.
A tech stock selloff deepened Thursday as investors confronted the mounting costs of Silicon Valley’s artificial intelligence ambitions. Microsoft (MSFT) stock plunged 6% and Facebook parent Meta (META) tumbled 4% after the companies reported earnings late Wednesday. And in after-hours trading Thursday following their own earnings releases, Amazon (AMZN) stock dropped more than 3% and Apple (AAPL) fell 2% — despite all four companies reporting strong quarterly profits. (Some of the stocks were edging back up in pre-market trading on Friday.)
Almost two years after ChatGPT kicked off Silicon Valley’s AI gold rush, this week’s tech earnings revealed both the promise and the staggering price tag of the AI revolution. While companies reported significant gains from AI initiatives —Meta’s ad prices up 11%, Google Cloud revenue surging 35% to $11.4 billion, Amazon’s AWS growing 19% to $27.5 billion — their warnings about future spending sparked a broad market retreat.
Meta expects capital expenditures of up to $40 billion next year, Microsoft cautioned about ongoing OpenAI losses and slowing cloud growth, and even Apple, making its first careful steps into AI with its Apple Intelligence rollout this week, saw investors retreat — despite record revenue of $94.9 billion.
Tech executives’ unwavering faith in AI’s potential stands in stark contrast to investors’ growing anxiety about the costs.
“First, it’s clear that there are a lot of new opportunities to use new AI advances to accelerate our core business that should have strong ROI over the next few years,” Meta CEO Mark Zuckerberg told investors.
Amazon chief Andy Jassy struck a similar note: “I think we’ve proven over time that we can drive enough operating income and free cash flow to make this a very successful return on invested capital business. We expect the same thing will happen here with generative AI.”
Microsoft CEO Satya Nadella emphasized “AI-driven transformation.” And earlier in the week, Google (GOOGL) chief Sundar Pichai highlighted “extraordinary momentum.”
But while tech leaders speak confidently about long-term returns, the market is increasingly focused on the short-term price tag of these ambitious visions. The mounting infrastructure costs, combined with uncertain timelines for returns, are testing investors’ patience with Silicon Valley’s spend-now-profit-later approach to innovation.
Microsoft stock fell more than 6% on Thursday after executives predicted Azure’s growth would slow and warned of weaker expansion in its AI-powered cloud business. The guidance suggested that even for Microsoft, which has emerged as an early AI leader through its partnership with ChatGPT maker OpenAI, the path to AI profits may be longer and costlier than investors hoped.
“AI-driven transformation is changing work, work artifacts, and workflow across every role, function, and business process,” said Nadella, whose company saw total revenue rise 16% to $65.6 billion. Microsoft’s overall cloud revenue climbed 22% to $38.9 billion, but the company expects growth in its intelligent cloud segment to slow to 18-20% next quarter.
At Google parent Alphabet, Pichai pointed to new AI features in Search and Cloud as key growth drivers helping push revenue up 15% to $88.3 billion. Google Cloud’s profit jumped to $1.9 billion from $266 million a year earlier, suggesting the company is finding ways to monetize its AI investments.
Meta leveraged AI to revitalize its core advertising business, with revenue jumping 19% to $40.6 billion. The company forecast fourth-quarter revenue between $45 billion and $48 billion, above analysts’ expectations. But CFO Susan Li warned of a “significant acceleration in infrastructure expense growth next year” due to the “back-end weighted nature” of 2024 capital expenditures and expanding AI infrastructure.
The massive spending plans highlight how AI’s transformation of the tech industry remains in its early stages. While the technology is beginning to deliver measurable business results, tech giants are betting billions that the real payoff still lies ahead — and asking investors for patience. Goldman Sachs (GS) has recently expressed concerns that while AI has the potential for significant efficiency gains in certain areas, the high costs associated with developing and maintaining AI systems could outweigh the benefits in many cases — potentially making it more expensive than simply hiring human workers for certain tasks.
With robust cash positions and strong core businesses, these companies appear able to sustain their AI investments even as costs mount. But the market reaction to Microsoft’s and Meta’s warnings serves as a reminder that even for tech’s strongest players, the AI revolution is proving to be an increasingly expensive proposition with an uncertain timeline for returns.
Like Jerry Maguire’s demanding client in the 1996 film, Wall Street’s message to Silicon Valley is getting clearer by the day. As a Bank of America (BAC) report puts it: “We expect AI to transition from a ‘tell me’ to a ‘show me’ story, with any disconnect between investments and revenue generation to come under increased scrutiny.”
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