Big Tech's AI Bets Surge, Market Bubble Fears Lingering

What Happened

Big Tech just signaled a massive push into artificial intelligence. Amazon, Alphabet, Meta, and Microsoft are all hiking their capital expenditure forecasts. This spending spree suggests the current market bubble might still have significant room to grow.

Last week, the tech giants unveiled colossal investment plans. Amazon now expects to hit $125 billion in full-year capital expenditure (capex), or spending on physical assets, for 2025. This is up from its earlier $118.5 billion outlook. Alphabet raised its spending guidance for the third quarter in a row. It now forecasts $92 billion, up from $85 billion. Meta also upped its capex range for the third time this year to $71 billion from $69 billion.

Microsoft reported roughly $35 billion in capital expenditures for its first fiscal quarter. This exceeded analyst expectations of $30 billion. The company anticipates even faster spending growth in fiscal year 2026. These figures don't even include all AI-related costs. Some firms use operating expenditures for third-party AI cloud providers like CoreWeave (CRWV). Both Microsoft and Meta are currently CoreWeave customers. This dual approach helps them meet demand while building their own data centers.

Why It Matters

Investors are largely betting that these rising costs are beneficial. They view them as a necessary investment for the machine-learning ecosystem. This spending also signals intense competition among tech rivals. That optimism is visibly boosting stock prices. Amazon shares hit an all-time high last week following its strong results. Alphabet stock also saw a significant jump.

However, the picture isn't uniform. Microsoft shares dipped slightly. Its Azure cloud revenue fell just below investors' exceptionally high expectations. Meta faced a steep stock loss. This reflected doubts about its AI strategy and its massive spending. Analysts confirm investor confidence in Big Tech's AI push remains strong. Most companies fund these projects from healthy core business cash flows. Meta is an exception; it raised $30 billion in debt last week. This ability to self-fund helps offset worries about soaring expenses. As Bokeh Capital Partners analyst Kim Forrest noted, “We still have the most profitable companies on earth able to spend from their own pocketbook.” This influx of cash fuels an AI arms race. Each company strives to out-innovate and out-scale its competitors.

The Long Game

Despite the current exuberance, the long-term return on these intelligent algorithm investments is uncertain. “It's impossible to know,” stated Kim Forrest. Alphabet already reported billions from machine-learning tools in its Google Cloud segment. Recent AI deals also drove its backlog, or future customer commitments, to $158 billion, up from $86.8 billion. Amazon Web Services (AWS) also exceeded revenue expectations. This was partly due to AI, boosting its backlog to $200 billion. Microsoft's Intelligent Cloud revenue, including Azure sales, also surpassed forecasts at $30.9 billion.

These immediate gains suggest a strong start. Still, the sheer scale of investment raises questions. Can these companies maintain profitability if hardware rapidly becomes obsolete? The upfront costs are immense. This demands continuous re-investment just to stay competitive.

The Hidden Costs

A significant concern moving forward is depreciation. This is the accounting expense that spreads the cost of an asset over its useful life. The value of powerful chips bought even a few years ago quickly diminishes. This rapid obsolescence can significantly erode profits. Alphabet's CFO, Anat Ashkenazi, specifically noted a “significant increase in depreciation expense” in the third quarter. This will continue to pressure profit margins. Amazon and Meta echoed these rising depreciation costs in their latest reports.

D.A. Davidson analyst Gil Luria highlighted the broader impact. “This is going to impact all these companies in a huge way,” he said. He further explained that layoffs and slower employee growth are directly linked to balancing this “huge drag on margins.” These companies are essentially trading human capital for computational capital. This strategic shift underscores the intense financial re-prioritization happening across Big Tech. The constant need for cutting-edge generative models and infrastructure means older equipment depreciates faster. This creates a perpetual cycle of massive capital expenditure.

Our Take

Big Tech's commitment to artificial intelligence is undeniable. Their massive capital expenditure forecasts underscore an urgent race for AI dominance. While this fuels optimism and current stock surges, fundamental questions persist. Can the long-term returns justify such immense, depreciating investments? The balancing act between innovation and profitability will define the next era for these tech giants. Investors should watch closely how these companies manage the hidden costs of their AI ambitions.