AI spending boom hits reality

THE US technology sector is entering a new phase of the artificial intelligence (AI) investment cycle, one where investors are no longer willing to give Big Tech a free pass on soaring capital expenditure (capex).

According to a recent Bloomberg report, recent volatility in technology stocks suggests markets are becoming increasingly uneasy about the scale of AI-related spending, even as the industry’s biggest players continue to double down on infrastructure.

For much of the past two years, investors appeared willing to overlook ballooning capital budgets as long as revenue growth remained strong and companies could convincingly pitch AI as the next multi-trillion-dollar opportunity.

That unwritten agreement is now showing signs of strain.

The shift comes as companies including Alphabet, Microsoft, Amazon and Meta Platforms prepare to spend unprecedented sums on AI infrastructure, from data centres (DCs) to specialised chips and networking equipment.

According to the average of analyst estimates compiled by Bloomberg, the four companies are projected to spend about US$724bil on capex this year, rising to almost US$950bil by 2027.

While executives continue to argue that these investments are necessary to stay competitive in the AI race, investors are increasingly asking when the spending will begin generating meaningful returns.

“People are really focused on capex, obsessed with it. It used to be the more the better, but now it is the less the better,” Jason Lemire, chief investment officer at Bold Wealth Partners, tells Bloomberg.

“We’re seeing capital raises, negative cash flows, rising debt. All that adds risk to the picture,” he says.

Deeper scrutiny

The changing mood reflects a broader reassessment of how much investors are prepared to tolerate before demanding evidence that AI investments can translate into sustainable earnings.

In previous quarters, technology companies that announced higher spending often saw their shares rewarded as markets viewed aggressive investment as a sign of confidence and leadership in AI. That relationship is becoming far less straightforward.

Instead, every increase in capex is now being scrutinised for its impact on profitability, cash flow and balance sheets.

According to Bloomberg, Alphabet’s second-quarter negative free cash flow has become a particularly striking example of how investor expectations are evolving.

Despite generating enormous revenue from its search, cloud and advertising businesses, the company’s accelerating AI investments highlighted the financial burden of building next-generation computing capacity.

The issue extends beyond individual earnings reports. Massive AI spending is fundamentally reshaping the business models of technology giants, introducing financial risks that investors previously paid little attention to during years of abundant cash generation.

“We’re in a period where people are inclined to sell on capex, and Microsoft and Meta and Amazon are all holding hands with Alphabet and jumping in to spend,” Willy Lee, principal at venture firm Neostellar Capital, tells Bloomberg.

“We’re going to see scrutiny on all parts of their businesses as they keep spending,” he adds.

AI winter

The concerns are not necessarily about AI itself. Rather, investors are questioning whether the enormous upfront costs required to build AI infrastructure can continue rising without eroding shareholder returns.

Unlike earlier technology cycles, where software businesses often generated high margins with relatively modest capital requirements, generative AI demands continuous investment in expensive graphics processing units (GPUs), servers, electricity, cooling systems and DCs.

This means even the largest technology companies are becoming significantly more capital intensive.

The implications stretch well beyond Silicon Valley. Chipmakers, memory manufacturers, DC operators and power infrastructure providers have all benefitted from the AI investment boom.

Yet, any sustained slowdown in spending could ripple across the broader technology supply chain.

Lemire believes the market may eventually face an inevitable correction after the current investment surge.

“There is going to be an AI winter at some point,” he says.

“When you look at how exceptional margins are – especially in memory – it is impossible to maintain those over a long time frame. At some point, we will see margin compression and valuation compression, and that will have an impact on the market.”

The term “AI winter” has historically referred to periods when enthusiasm and investment in AI faded after expectations ran ahead of commercial reality.

While today’s AI landscape is significantly more mature than previous cycles, some investors worry valuations have once again become heavily dependent on optimistic long-term assumptions.

Looking cheap

Others remain more patient. Brad Warden, senior portfolio manager at Nomura Asset Management, whose fund owns Nvidia, Alphabet, Microsoft and Amazon, believes the companies are likely to generate returns from today’s investments, even if markets are becoming less forgiving during the transition.

According to Bloomberg, Warden argues that traditional valuation metrics have become less useful because AI is reshaping competitive dynamics across the technology industry.

“They look cheap right now, but when you look forward at potential disruption, they are guilty until proven innocent. Is the current business model sustainable? Will economics get worse?” Warden said.

“It really comes down to what pain you’re willing to endure in an investment cycle and how strongly you believe you’ll ultimately get the economics on the other end of the cycle.”

For investors, that increasingly appears to be the defining question for the second half of the year.

The AI race remains firmly intact and few technology companies can afford to slow investment while competitors continue expanding computing capacity.

Yet, as capital budgets climb towards the trillion-dollar mark over the next few years, according to Bloomberg’s analysis of analyst estimates, markets are signalling that future spending alone will no longer be enough to justify premium valuations.

Instead, investors are likely to demand clearer evidence that today’s record-breaking AI investments can eventually deliver sustainable cash flows, resilient margins and durable earnings growth.