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Business Times
2 days ago
- Business
- Business Times
AI bets that fuelled Big Tech's surge now threaten rich profits
[NEW YORK] Some investors are questioning the amount of cash Big Tech is throwing at artificial intelligence, fuelling concerns for profit margins and the risk that depreciation expenses will drag stocks down before companies can see investments pay off. 'On a cash flow basis they've all stagnated because they're all collectively making massive bets on the future with all their capital,' said Jim Morrow, founder and chief executive officer at Callodine Capital Management. 'We focus a lot on balance sheets and cash flows, and so for us they have lost their historical attractive cash flow dynamics. They're just not there anymore.' Alphabet, Meta Platforms and Microsoft are projected to spend US$311 billion on capital expenses in their current fiscal years and US$337 billion in 2026, according to data compiled by Bloomberg. That includes a more than 60 per cent increase during the first quarter from the same period a year ago. Free cash flow, meanwhile, tumbled 23 per cent in the same period. 'There is a tsunami of depreciation coming,' said Morrow, who is steering clear of the stocks because he sees profits deteriorating without a corresponding jump in revenue. Much of the money is going towards things like semiconductors, servers and networking equipment that are critical for artificial intelligence computing. However, this gear loses its value much faster than other depreciating assets like real estate. Microsoft, Alphabet and Meta posted combined depreciation expenses of US$15.6 billion in the first quarter, up from US$11.4 billion a year ago. Add in Amazon, which has pumped more of its cash into capital spending in lieu of buybacks or dividends, and the number nearly doubles. BT in your inbox Start and end each day with the latest news stories and analyses delivered straight to your inbox. Sign Up Sign Up 'People thought AI would be a monetisation machine early on, but that hasn't been the case,' said Rob Almeida, global investment strategist at MFS Investment Management. 'There's not as fast of AI uptake as people thought.' AI bounce Of course, investors still have a hearty appetite for the technology giants given their dominant market positions, strong balance sheets and profit growth that, while slowing, is still beating the rest of the S&P 500. This explains the strong performance of AI stocks recently. Since April 9, the day President Donald Trump paused his global tariffs and turned a stock market swoon into a boom, the biggest AI exchange-traded fund, the Global X Artificial Intelligence & Technology ETF, is up 34 per cent, while AI chipmaker Nvidia Corp. has soared 49 per cent. Meta has gained 38 per cent, and Microsoft has climbed 33 per cent – all topping the S&P 500's 21 per cent jump and the tech-heavy Nasdaq 100 Index's 28 per cent bounce. Just Tuesday, Bloomberg News reported that Meta leader Mark Zuckerberg is recruiting a secretive AI brain trust of researchers and engineers to help the company achieve 'artificial general intelligence,' meaning creating a machine that can perform as well as humans at many tasks. It's a monumental undertaking that will require a vast investment of capital. And in response Meta shares reversed Monday's decline and rose 1.2 per cent. But with more and more depreciating assets being loaded on the balance sheet, the drag on the bottom line will put increased pressure on the companies to show bigger returns on the investments. Dealing with depreciation This is why depreciation was a frequent theme in first-quarter earnings calls. Alphabet chief financial officer Anat Ashkenazi warned that the expenses would rise throughout the year, and said management is trying to offset the non-cash costs by streamlining its businesses. 'We're focusing on continuing to moderate the pace of compensation growth, looking at our real estate footprint, and again, the build-out and utilisation of our technical infrastructure across the business,' she said on Alphabet's April 24 earnings call. Other companies are taking similar steps. Earlier this year, Meta Platforms extended the useful life period of certain servers and networking assets to five and a half years, from the four-to-five years it previously used. The change resulted in a roughly US$695 million increase in net income, or 27 cents a share, in the first quarter, Meta said in a filing. Microsoft did the same in 2022, increasing the useful lives of server and networking equipment to six years from four. When executives were asked on the company's April 30 earnings call about whether increased efficiency might result in another extension, chief financial officer Amy Hood said such changes hinge more on software than hardware. 'We like to have a long history before we make any of those changes,' she said. 'We're focused on getting every bit of useful life we can, of course, out of assets.' Amazon, however, has taken the opposite approach. In February, the e-commerce and cloud computing company said the lifespan of similar equipment is growing shorter rather than longer and reduced useful life to five years from six. To Callodine's Morrow, the big risk is what happens if AI investments don't lead to a dramatic growth in revenue and profitability. That kind of market shock occurred in 2022, when a contraction in profits and rising interest rates sent technology stocks plummeting and dragged the S&P 500 lower. 'If it works out it will be fine,' said Morrow. 'If it doesn't work out there's a big earnings headwind coming.' BLOOMBERG
Yahoo
01-05-2025
- Business
- Yahoo
AI ETFs Set to Gain on Robust Meta, Microsoft Earnings
Meta Platforms META and Microsoft MSFT reported robust quarterly earnings, boosting investor confidence in the artificial intelligence (AI) sector. The dual earnings underscore that strong demand for AI is helping both companies navigate economic uncertainty driven by tariffs. Both tech giants surpassed the Zacks Consensus Estimate, leading to a surge in their stock prices and spreading huge optimism into AI-related stocks across the the reports, NVIDIA (NVDA) and Advanced Micro Devices (AMD) rose 2.8% and 2%, respectively, while Amazon (AMZN) jumped 3% in after-hours trading. Alphabet (GOOGL) also saw a modest increase of more than 1%. Investors may tap the opportunity with AI ETFs like Global X Artificial Intelligence & Technology ETF AIQ, Global X Robotics & Artificial Intelligence ETF BOTZ, ROBO Global Robotics & Automation Index ETF ROBO, ARK Autonomous Technology & Robotics ETF ARKQ, First Trust Nasdaq Artificial Intelligence and Robotics ETF ROBT, ROBO Global Artificial Intelligence ETF THNQ and Amplify AI Powered Equity ETF AIEQ. Meta Platforms reported earnings per share of $6.43, which topped the Zacks Consensus Estimate of $5.22 and increased 37% from the year-ago quarter. Revenues grew 16% year over year to $42.3 billion and came above the estimated $41.22 billion (read: Can Q1 Earnings Inject Fresh Life Into Magnificent 7 ETFs?). In a strategic move, Meta raised its capital expenditure guidance to $64-$72 billion from the previous projection of $60-$65 billion for 2025. The new guidance 'reflects additional data center investments to support artificial intelligence efforts as well as an increase in the expected cost of infrastructure hardware.' Microsoft reported earnings per share of $3.43, beating the Zacks Consensus Estimate of $3.20 and improving 18% from the year-ago earnings. Revenues grew 13% year over year to $70.07 billion, edging past the consensus estimate of $68.38 billion. Strong demand for Cloud services and AI infrastructure drove the is one of the biggest beneficiaries of the AI boom. It has been pouring billions into building its AI infrastructure and expanding its data-center footprint. During a call with analysts, chief financial officer Amy Hood said Azure will grow as much as 35%, adjusting for currency fluctuations, during the ongoing quarter. The latest earnings underscore the resilience and growth potential of AI-focused companies. While the significant capital expenditures raise questions about short-term profitability, the long-term potential of AI technologies presents substantial opportunities for growth. The global AI market is undergoing remarkable growth, fueled by key drivers such as the widespread adoption of digital technologies, increasing awareness of AI's potential, and the rising demand for convenient online services. This rapid expansion is further propelled by major advancements in AI robotics, autonomous systems, sensor technology, computer vision, machine learning, natural language processing and generative AI (read: A Glimpse at Trump's 100 Days in Office: ETF Winners & Losers).A new UN Trade and Development report projects the global AI market will soar from $189 billion in 2023 to $4.8 trillion by 2033, representing a 25-fold increase in just a decade. Per Grand View Research, the global AI market is expected to witness a compound annual growth rate of 35.9% from 2025 to 2030 to reach $1,811.75 billion by 2030. Statista projects that the AI market will reach $244.22 billion in 2025 and $1.01 trillion by 2031 at a CAGR (2025-2031) of 26.60%. Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Microsoft Corporation (MSFT) : Free Stock Analysis Report ARK Autonomous Technology & Robotics ETF (ARKQ): ETF Research Reports ROBO Global Robotics and Automation Index ETF (ROBO): ETF Research Reports Global X Robotics & Artificial Intelligence ETF (BOTZ): ETF Research Reports Amplify AI Powered Equity ETF (AIEQ): ETF Research Reports Global X Artificial Intelligence & Technology ETF (AIQ): ETF Research Reports First Trust NASDAQ Artificial Intelligence and Robotics ETF (ROBT): ETF Research Reports ROBO Global Artificial Intelligence ETF (THNQ): ETF Research Reports Meta Platforms, Inc. (META) : Free Stock Analysis Report This article originally published on Zacks Investment Research ( Zacks Investment Research Sign in to access your portfolio
