Microsoft and Amazon Capex in Focus Amid Potential AI Pullback
(Bloomberg) -- When the two biggest players in cloud computing report earnings this week, the amount the companies are spending will be just as interesting to investors as how much they are making.
Ahead of results from Microsoft Corp. on Wednesday, and Amazon.com Inc. on Thursday, there have been reports suggesting that both companies may be cutting back on their spending on artificial intelligence infrastructure.
That puts a spotlight on the capital expenditures announced in the latest earnings, which will offer insight into the outlook for AI demand and the broader consequences that might have for the economy.
'A slowdown in cloud computing or capex would scream economic caution and speak to recession fears in corporate America,' said Joe Tigay, portfolio manager of the Rational Equity Armor Fund. 'Any cutback in growth is hurtful to valuations, and would be damaging to the overall market. While multiples have come down a lot, we're not drastically cheap by any historical measure. If we are on a recessionary path, multiples will get a lot lower.'
Both Microsoft and Amazon have declined this year, largely tracking the market lower as tariff risks have amplified concerns about economic growth. Amazon is more than 20% off a February peak, while Microsoft hasn't hit an all-time high since July.
The four biggest spenders on AI infrastructure — Alphabet Inc. and Meta Platforms Inc., along with Microsoft and Amazon — are expected to spend more than $300 billion in their current fiscal years. The money plowed into AI-related investments had led to soaring stock gains in companies like Nvidia Corp., Super Micro Computer Inc., and Arista Networks Inc.
Recently, though, Microsoft and Amazon have been at the center of a shift in expectations around industry spending. Bloomberg News reported that Microsoft has pulled back on data center projects around the world, with some of the pause coming abruptly. TD Cowen analyst Michael Elias last week wrote that channel checks 'indicate material MSFT equipment order cancellations' for data center supplies with a 'long-lead time.'
Separately, Wells Fargo Securities wrote that Amazon's web services business is pausing some data center leases, although Kevin Miller, vice president of global data centers at Amazon Web Services, later wrote that there 'haven't been any recent fundamental changes in our expansion plans,' and that it continues to see 'strong demand for both Generative AI and foundational workloads on AWS.'
Alibaba Group Holding Ltd. Chairman Joe Tsai had warned in March of a 'bubble' in data center construction. The emergence of the Chinese AI startup DeepSeek scrambled forecasts for future spending after the newcomer claimed performance that was comparable to U.S. models despite costing less and requiring fewer chips. Investors are also increasingly looking for the AI investments to translate to growth in a more pronounced fashion.
Ned Davis Research closed its overweight recommendation on AI stocks last week, writing that the downturn in the group can continue, especially with the new risks created by the Trump administration's trade war.
'Higher policy uncertainty often leads to lower capex spending. We see no reason data center capex spending would be excluded,' wrote Pat Tschosik, the firm's chief thematic strategist. He added that 'AI spending is seen as discretionary and, just as companies pull back on capex in an economic downturn, they pull back on AI application development as well.'
Alphabet Inc. reported capex of $17.2 billion last quarter, slightly more than had been expected. It plans to spend $75 billion on capex this year.
The Google parent also posted better-than-expected operating profits for its Google Cloud business, even as sales slightly missed the analyst consensus. The company said there was more customer demand than company capacity for the cloud business, echoing comments made by all three cloud giants last quarter.
Microsoft results are expected to show net earnings growth of 9.7% and revenue growth near 11%. Amazon's revenue is seen rising 8.2% with net earnings soaring almost 40%. Both are expected to grow consistently in the coming years, a key reason why Wall Street is nearly uniformly positive on them. For both names, more than 90% of the analysts tracked by Bloomberg recommend buying the shares.
Jim Worden, chief investment officer of Wealth Consulting Group, is among those who retains a positive view on the pair.
'I don't think we'll see big reductions in capex, though there will likely be some discussion about being more efficient and how to best spend the money,' he said. 'Uncertainty is still really really high, but we've barely touched the surface for AI demand and use cases, so investors need to be patient and play the long game.'
ServiceNow surged 22% last week, capping a record weekly gain, after the software company issued an outlook for sales growth that topped analysts' estimates, suggesting that software demand remains resilient even as the economy reels from the threat of tariffs.
--With assistance from Subrat Patnaik.
More stories like this are available on bloomberg.com
First Published: 29 Apr 2025, 03:44 PM IST
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