Big Tech Burning $700 Billion This Year Alone… What's the Real Reason Behind Their Unstoppable Spree, Despite Wall Street's 'AI Bubble' Warnings?

▲ What's the real reason behind their unstoppable spree, despite Wall Street's 'AI bubble' warnings?/Photo: AI-generated image

As the global artificial intelligence (AI) craze drives infrastructure construction at an unprecedented scale, Wall Street's caution and skepticism are growing.

Big tech companies are pouring astronomical amounts of money, but as questions about the profitability recovery cycle grow, their stock prices are undergoing adjustments, leading to analyses that 'AI fatigue' may be setting in. However, despite these sustainability concerns, there are calculated reasons behind why hyperscalers (operators of ultra-large data centers) continue their enormous investments.

According to the investment media outlet The Motley Fool on June 27 (local time), the four tech giants – Amazon (AMZN), Alphabet (GOOGL), Microsoft (MSFT), and Meta Platforms (META) – are expected to spend a total of $700 billion on capital expenditures (Capex) this year, including the construction of AI data centers.

This figure significantly exceeds the combined annual net income of these companies. With the recent official confirmation of soaring memory semiconductor prices through Micron's earnings announcement, coupled with concerns about increased cost burdens, Wall Street's anxiety has deepened.

Indeed, reflecting these concerns, the stock prices of hyperscaler companies have faced significant downward pressure this year. Microsoft recently hit a new 52-week low, and Meta is also fluctuating near its new low. Amazon and Alphabet are performing relatively well, but Alphabet is the only one that has caught up with the S&P 500 index's return since the beginning of this year.

Despite Wall Street's pessimism, the reason big tech companies are pushing ahead with investments akin to a runaway train is clear. Amazon, Alphabet, and Microsoft, excluding Meta, have strong core cloud computing businesses that can immediately justify their investment expenditures.

For example, Amazon Web Services (AWS) reported a 28% surge in revenue to $37.6 billion in the first quarter compared to the same period last year, with operating profit reaching $14.2 billion. For a massive platform that already earns over $50 billion annually from its cloud business alone, preempting chips, servers, and data center capacity to meet the surging demand from customers driven by the AI boom is not a risk but a necessary choice for survival.

On the other hand, Meta, which lacks its own cloud infrastructure revenue and thus finds it difficult to prove a direct value recovery formula for its investments, faces the strictest scrutiny from Wall Street. While Meta's AI investments immediately contribute to enhancing its ad targeting engine, CEO Mark Zuckerberg is concentrating capital on superintelligence development, hardware ecosystems like VR headsets and smart glasses, and the metaverse sector. Furthermore, Meta is also considering options to launch its own cloud business in the future, indicating that it's difficult for them to stop betting on securing future power.

In conclusion, while the current surge in capital expenditures does indeed fuel temporary bubble concerns, the prevailing analysis is that given the overwhelming earning power and fundamental strength of these four major companies, it is a reasonable bet that can absorb and manage the risks of soaring costs.

The growth of the cloud sector continues to be evident, and the valuation multiples of big tech companies are also in a very rational range compared to the past. If the actual value recovery performance from AI infrastructure investments begins to be proven on the books faster than market expectations, the currently adjusted big tech stock prices hold sufficient upward momentum to stage a powerful rally breaking through previous highs.

*Disclaimer: This article is for investment reference only, and we are not responsible for investment losses based on it. The content should be interpreted for informational purposes only.*