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Meta, Microsoft ( MSFT ) boost capital spending on AI

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Amazon AI spending seen likely to spike, too

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Big Tech's AI investments may crunch short-term gains

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AI chip supply constraints hamper infrastructure build-out

By Anna Tong, Aditya Soni and Deborah Mary Sophia

Oct 31 (Reuters) - Big tech including Microsoft ( MSFT )

and Meta are stepping up spending to build out AI data

centers in a rush to meet vast demand, but Wall Street is hungry

for a quicker payday on the billions invested.

Microsoft ( MSFT ) and Meta both said on Wednesday their capital

expenses were growing due to their AI investments. Alphabet

, too, reported on Tuesday that these expenditures

would remain elevated.

Amazon ( AMZN ), which is set to report results on Thursday,

is likely to echo these forecasts.

The extensive capital spending could threaten fat margins at

these companies, and pressure on this metric is likely to spook

investors.

Big tech shares fell in after-hours trading on Wednesday,

highlighting the challenges the companies face as they seek to

balance ambitious AI pursuits with the need to reassure

investors they are focused on short-term results.

Meta's stock fell 2.9% in after-hours trading, and

Microsoft's ( MSFT ) stock price fell 3.6%, despite each topping profit

and revenue expectations for the July-September period.

Amazon ( AMZN ) stock also dipped.

"It's costly to run AI technology. Getting capacity is

expensive," said GlobalData analyst Beatriz Valle.

"It has become a competitive race among the big tech

companies to build out capacity. It's going to take time to see

the returns, to see widespread adoption of the technology."

Microsoft's ( MSFT ) capital spending for a single quarter now is

more than its annual expenditure used to be until fiscal 2020,

according to Visible Alpha. For Meta, a quarter's worth of

spending is in line with what they spent in a year until 2017.

Microsoft ( MSFT ) said capital spending rose 5.3% to $20 billion in

its first fiscal quarter, and predicted increased spending on AI

in the second.

But growth at its key cloud business Azure is likely to

slow, it warned, blaming capacity constraints at its data

centers.

"I think what investors are missing is that for every year

Microsoft ( MSFT ) overinvests - like they have this year - they're

creating a whole percentage point of drag on margins for the

next six years," said Gil Luria, head of technology research at

D.A. Davidson.

Meta, meanwhile, warned of "significant acceleration" in

artificial intelligence-related infrastructure expenses next

year.

BOTTLENECKS IMPEDE GROWTH

Capacity constraints are rippling through the tech industry.

Chipmakers including powerhouse Nvidia ( NVDA ) are

struggling to keep up, in turn making it harder for cloud

companies to build out capacity.

Advanced Micro Devices ( AMD ), which reported results

earlier this week, said demand for AI chips was rising much

faster than supply, limiting its ability to tap the order surge.

It warned that supply of AI chips would be tight going into next

year.

Despite the concerns, Meta and Microsoft ( MSFT ) said it was still

very early in the AI cycle and emphasized the long-term

potential of AI.

The investments are reminiscent of when Big Tech was

developing cloud businesses and waiting for customers to embrace

the technology.

"Building out the infrastructure is maybe not what investors

want to hear in the near term, but I think the opportunities

here are really big," said Meta CEO Mark Zuckerberg during

Wednesday's earning call. "We're going to continue investing

significantly in this."