Artificial Intelligence Investments and Revenue – A Month’s Worth

AI, you’ve done it to me.

Even when eliminating most of the news items about it, those focusing on the future instead of the present and on other factors irrelevant to what is happening with the technology itself, there are too many for even weekly posts.  So I have divided it into subtopics, of which this is the first to get publication. 

The oldest here is “Microsoft’s Steep AI Investments Raise Questions About Returns” (Patrick Seitz, Investor’s Business Daily, July 10^th).  As crisply put by a Morgan Stanley analyst, “with Microsoft’s capital expenditures poised to nearly double from $32 billion in fiscal 2023 to our forecasted $63 billion in fiscal 2025, the question of monetization against these investments rises to the forefront for many investors.”  The analyst still rated the stock highly, but, per the author, “after digging into the question of return on investment,” “was left with more questions than answers” because of a “lack of visibility.”

The first item in the July 19^th Goldman Sachs Briefings was “Will the $1 trillion in AI spending pay off?.”  The determination here was “AI may prove far less promising than many business leaders and investors expect,” per an MIT professor who “estimates that only a quarter of AI-exposed tasks will be cost-effective to automate within the next 10 years – which means that AI will impact less than 5% of all tasks and boost US productivity by only 0.5% and GDP growth by 0.9% cumulatively over the next decade.”  A Goldman Sachs research head went “a step further” by saying that “there’s not a single thing that this is being used for that’s cost-effective at this point.”

On the other hand, “Alphabet Reports 20% Jump in Profit as A.I. Efforts Begin to Pay Off” (Nico Grant, The New York Times, July 23^rd).  “The company has incorporated generative A.I. into all of its products and increased its spending on data centers and associated hardware to underpin the technology.  Now, Google executives said, those investments have started to bear fruit,” with second-quarter profit of $23.6 billion.  However, Victor Tangermann, in “Investors Are Suddenly Getting Very Concerned That AI Isn’t Making Any Serious Money” in Futurism.com on July 27^th, reported that “investment bankers are… starting to become wary of Big Tech’s ability to actually turn the tech into a profitable business," saying that Google’s earning report was “failing to impress investors with razor-thin profit margins and surging costs related to training AI models.”  Still pertinently, a “tech stock analyst” wrote back in March that “capital continues to pour into the AI sector with very little attention being paid to company fundamentals… a sure sign that when the music stops there will not be many chairs available.” 

Perhaps in reaction to these pieces and the thoughts behind them, “Tech Bosses Preach Patience as They Spend and Spend on A.I.” (Karen Weise, The New York Times, August 2^nd).  “The tech industry’s biggest companies have made it clear over the last week that they have no intention of throttling their stunning levels of spending on artificial intelligence, even though investors are getting worried that a big payoff is further down the line than once thought.”  On a week ago Thursday, Mark Zuckerberg of Meta said he would spend “at least $37 billion” on “new tech infrastructure,” and “would spend even more next year.”  “In the last quarter alone, Apple, Amazon, Meta, Microsoft, and Google’s parent company Alphabet spent a combined $59 billion on capital expenses, 63 percent more than a year earlier and 161 percent more than four years ago.”  Another Goldman Sachs executive asked “What $1 trillion problem with A.I. solve?,” and implied that “replacing low wage jobs with tremendously costly technology” was not sufficient justification.  Yet leaders of the other largest IT firms also emphasized the need to be at the front of AI progress, and that true business success there might take a long time.

Is it true that “The AI supply chain is in jeopardy” (Guy Scriven, The Economist, August 3^rd)?  “About a year ago,” he “started to ask analysts what it would take to stop the… (AI) bull run.  Most suggested it would end if big tech firms failed to deliver meaningful AI-related sales for a couple of quarters in a row.  It took more than a couple of quarters, but over the past two weeks, as the tech giants reported their earnings, that scenario has started to play out.”  Adding to general murkiness is that Microsoft, where “growth in this revenue stream has been slowing,” “is still the only big tech firm that puts a figure to its AI sales.”  He echoed that “scepticism has set in among investors,” and opined that “the boom looks somewhat precarious,” as “the larger risk is that demand peters out.”

Will it, or won’t it?