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Reporter of China Business Network: Wen Qiao Intern reporter of China Business Network: Yue Chupeng Editor of China Business Network: Lan Suying

Following the collapse of the US tech giants last week,ChatGPTAfter the "darkest moment" since the AI ​​market exploded, technology stocks staged a "roller coaster" market this week.

Take Nvidia as an example. On July 30, the stock plunged 7%, but soared nearly 13% overnight. On August 1, Nvidia plunged again, closing down nearly 7%. The Nasdaq index, which is dominated by technology stocks, also followed suit. As of the close of August 3, the weekly decline exceeded 3.8%.

Behind the dramatic fluctuations is the market's growing concerns about the returns of technology companies' huge investments in AI. Following Tesla and Google's parent company Alphabet, the other four members of the "Big Seven" - Microsoft, Apple, Meta, and Amazon - also released their financial reports this week. Data shows that most of the giants' huge investments in AI have not yet brought returns far exceeding expectations, and Wall Street has begun to lose patience.

But in stark contrast to Wall Street's concerns and doubts, technology companies are still "burning money" in the field of AI. The Daily Economic News sorted out the financial reports of recent quarters and found that the overall capital expenditures and R&D expenditures of the giants are still on an upward trend and remain at a high level. What are the considerations behind their persistence?

Revenue side: AI monetization is still the biggest challenge for tech giants, and Wall Street is getting impatient

The market has high hopes for the AI ​​projects of technology giants, expecting them to bring new impetus to performance and continue the miracle of the US stock market. Goldman Sachs said at the beginning of this year: "Performance supports valuation, and revenue growth is the key."

But last week, the earnings reports of Tesla and Alphabet dealt a heavy blow to the US stock market. This week, Microsoft, Meta, Apple and Amazon also released their earnings reports. Although the overall revenue and profits of the four companies exceeded market expectations, the market reactions were different, and the three major US stock indexes also jumped back and forth between gains and losses.

Judging from the performance of the week, among the "Big Seven", only Meta and Apple increased, with increases of 0.87% and 4.82% respectively, while the other five all fell, with Amazon having the largest drop of 8%.

Chris Morris of Fastcompany, a financial business media, believes that "growth in the AI ​​sector is more important to investors than earnings today."

A reporter from the "Daily Economic News" reviewed the growth of AI-related businesses of Google, Microsoft, Amazon and Meta in the past year and found that the revenue growth of these businesses did not continue to rise steadily, and even experienced a sharp decline in some quarters.

Let’s look at Microsoft first. In the fourth quarter of fiscal year 2024 ending June 30, 2024, Microsoft Azurecloud computingBusiness revenue grew 29% year-over-year, but fell short of analysts' expectations of 31%. This was the first time the division's growth fell short of expectations since 2022, and was also lower than the growth in the past two quarters.

As for Amazon, the company's cloud business AWS continued to recover in the second quarter of this year, with revenue growing 19% to approximately US$26.3 billion, exceeding expectations. However, the company's third-quarter performance guidance disappointed investors. Amazon expects third-quarter revenue to grow by about 8% to 11% year-on-year, an average lower than expected. If the forecast comes true, it will be the lowest growth rate since December 2022. Analysts believe that this guidance is worrying about the prospects of Amazon's cloud business.

This is somewhat similar to what happened to Google last week. As the AI ​​division's revenue in the second quarter fell short of Wall Street's expectations and the advertising revenue of the YouTube video platform fell short of expectations, and Google expected further growth in expenses in the third quarter, investors were concerned about its future profit margins. As a result, Google's stock price fell 5% on the day of the earnings report.

Apple has been criticized for lagging behind in the field of AI. The financial report was released only two months after the release of "Apple Smart", and AI has not yet helped its business. Well-known technology journalist Mark Gurman commented, "Financially, everything is fine for Apple, but the company has greatly lost its pace of innovation and may have missed the latest major new products... I don't think there will be any game-changing blockbuster products in Apple's product roadmap for the next two to three years. Any breakthrough will not appear until around 2027."

However, Meta's integration of AI has been fully recognized by the market. The company's AI-driven digital advertising market share continues to grow, with advertising revenue increasing by 22% year-on-year, while its biggest competitor Google's advertising revenue increased by only 11%, only half of Meta's.

However, the performance of technology stocks, such as Nvidia, also shows that the current revenue growth brought by AI may not be enough for Wall Street. Daniel Morgan, senior portfolio manager at Synovus Trust, analyzed that "Wall Street does not have much patience. After they see you spend billions of dollars, they want to see a substantial increase in revenue. If these technology companies do not perform beyond expectations or far beyond expectations, then they may be eliminated."

Current investors are more interested in seeing how AI can increase revenue or expand profit margins, which Wedbush analysts call "emerging AI monetization," meaning any revenue driven by various AI-related services. Emily Roland of John Hancock Investment Management also said that the challenge seen during the earnings season is that while earnings exist, investors want to see how (AI) is reflected in sales growth and monetization.

Spending: Billions of dollars are invested in AI, and giants say it is related to future survival

The ambitions of technology companies to invest in AI stand in stark contrast to Wall Street's concerns and skepticism. In this week's earnings conference, facing analysts' questions, technology company executives including Microsoft Chairman and CEO Satya Nadella and Apple CEO Tim Cook are trying to reassure investors and convince them that the huge investments in AI are reasonable and expected to pay off.

At present, technology companies are still firmly "spending money" to support AI research and development. After analyzing and comparing the financial reports of Google, Microsoft, Apple, Amazon and Meta in recent quarters, the reporter of "Daily Economic News" found that their overall capital expenditures and R&D expenditures are almost all on the rise, and they are all maintained at a high level. In the latest quarter, capital expenditures mostly maintained double-digit growth. In particular, the capital expenditures of Microsoft and Amazon have gradually climbed to nearly US$20 billion.

Last week, the Daily Economic News reported that Google's parent company Alphabet did not disclose the specific proportion of its total AI R&D investment in its financial report, but foreign media revealed that in the second quarter of this year, Alphabet invested $2.2 billion in DeepMind and Google Search to build AI models, a figure higher than the $1.1 billion in the same period last year. Moreover, Alphabet plans to invest at least $12 billion per quarter by the end of 2025.

At the earnings conference held on July 30, Microsoft stated that it will continue to expand its investment in Microsoft Cloud and AI infrastructure to meet growing demand. At the same time, Microsoft executives revealed that capital expenditures in the fourth quarter of fiscal year 2024 will jump from US$14 billion in the previous quarter to US$19 billion, reaching the highest single-quarter level since fiscal year 2024.

Amy Hood, Microsoft's executive vice president and chief financial officer, said that almost all capital expenditures are used for AI and cloud computing, and half of them are used for infrastructure investment, which is mainly built to meet AI-related needs.

But at the same time, Microsoft also gave Wall Street a "vaccine" at the earnings conference. The company said, "It is expected that the growth of AI services (revenue) will be constrained by current capacity limitations in the first half of the next fiscal year."

Turning to Amazon, after focusing on cost-cutting over the past two years, the company is betting big on generative AI. According to Reuters, citing forecasts from the London Stock Exchange, Amazon's capital investment, mainly for building cloud and generative AI infrastructure, grew 43% in the second quarter of this year to $16.41 billion. This is an increase of about $1.5 billion from the previous three months.

During an earnings call on August 1, Amazon Chief Financial Officer Brian Olsavsky pledged to invest more in the second half of the year, with much of the spending going to support the growth needed in AWS infrastructure.

The same is true for Meta. The reporter noted that the company expects capital expenditures to continue to increase next year, mainly for AI research and product development. Meta had expected full-year capital expenditures in 2024 to be between $35 billion and $40 billion, up from $30 billion to $37 billion in 2023.

Although Apple's capital expenditure growth rate is slightly lower than that of other giants, its rapid promotion of "Apple Intelligence" this year also proves its determination to increase its investment in AI. In the earnings conference, Apple CEO Tim Cook spent most of his time avoiding questions about the sales growth brought by AI. Although capital expenditures are on a downward trend according to the earnings data, Cook admitted that the company's AI costs are rising.

What are the considerations of technology giants in investing in AI development on such a large scale?

It has been reported that investment in AI involves the reconstruction of the entire computing platform, comparable to the transition from mainframes to personal computers in the 1980s. In this new AI computing era, every company must upgrade its infrastructure to remain competitive. For companies, AI investment has become a matter of survival rather than just pursuing incremental profits. This may be a problem that Wall Street has overlooked.

This also echoes the previous statements made by Meta CEO Zuckerberg and Google CEO Pichai: they would rather overinvest than underinvest, because lagging behind in competition in the technology industry means "having nothing."

Zuckerberg admitted in an interview in July that the consequence of falling behind is that the company will be at a disadvantage in the most important technologies in the next 10 to 15 years. Pichai also expressed a similar view in last week’s earnings conference: Although AI is costly, the risk of underinvestment is far greater than the risk of overinvestment for the company.