AI casts pall over big tech earnings

Investors appear to be losing patience with big tech’s prodigious artificial intelligence (AI) investments after Meta Platforms signalled deeper spending and a long road to profitability.

The concession from Meta in its quarterly report late on Wednesday cast a cloud over Microsoft and Alphabet, which were both set to report quarterly earnings after the market closed on Thursday.

Shares of Meta Platforms sank 13% on Thursday, sparking a selloff in big tech stocks. The drop was set to erase nearly $170bn from the company's market value and triggered a fall of between 3% and 4.2% in shares of Microsoft and Alphabet. Wall Street’s heavyweight tech-related companies have been locked in a fierce battle to advance generative AI.

Meta CEO Mark Zuckerberg, who floored Wall Street last year with his cost-cutting drive, said on a post-earnings call that costs would grow “meaningfully” in the coming years before Meta makes “much revenue” from some of its AI products.

That stoked investor fears that Zuckerberg was plunging Meta into another costly endeavor at a time when its augmented and virtual reality business is losing billions of dollars each quarter.

Analysts peppered Zuckerberg with questions about how the company was pacing its AI investments. One analyst asked whether Meta was spending more because it saw an even bigger opportunity from AI.

“I think we’ve gotten more ambitious and optimistic on AI,” Zuckerberg responded, pointing to Meta’s recent launches of new AI models. “All of that basically encourages me to make sure that we’re investing to stay at the leading edge of this.”

Alphabet and Microsoft both said earlier this year when they reported fourth-quarter results that they expected rising AI costs. The investor reaction on Thursday indicated deepening concerns.

In a note on Monday about Alphabet, New Street Research analysts said the potential for materially higher capital expenditure was a worry.

The research firm said it now expects Alphabet’s full-year capital expenditure to be $45.9bn, up from its previous estimate of $42.7bn.

Creating content with generative AI is energy intensive, and Zuckerberg cited that as a reason for Meta’s higher expenses.

Microsoft has positioned itself to be a winner in AI due to its partnership with OpenAI, which kicked off the generative AI craze last year with ChatGPT, said analysts from Jefferies in a note on March 31.

Industry-wide, shareholders are now focused on looking for revenue, including pricing models and whether customers can find use cases that justify the cost of generative AI, Jefferies wrote.

“Last year was spent dreaming of gen AI’s potential,” the analysts wrote. “This year will be about moving forward with concrete steps.”