AI's bottomless pit problem: Investors are scrutinizing costs
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Investors are scrutinizing the AI trade amid concerns that companies may be throwing money into a bottomless pit.
Why it matters: Not all AI spending is created equal. Investors are drawing a harder line on companies that fail to show how today's AI investments will translate into profits.
- "It's all about capex and free cash flow — and investors are not rewarding negative free cash flow," Melissa Otto, head of S&P Global's Visible Alpha Research, tells Axios in an email.
The big picture: The markets have punished several AI titans over AI capital expenditure concerns in recent days.
- SpaceX plunged to new lows Wednesday, even after the company topped revenue expectations in Tuesday's earnings report, as investors fretted over its massive capex plans.
- AMD shares slumped Wednesday despite a 50% jump in revenue as investors look for evidence that its customers' AI infrastructure investments will continue translating into accelerating returns, Emarketer analyst Jacob Bourne tells Reuters.
- Meta shares are down nearly $200 per share from their peak as the company continues to invest heavily in capex, having reported a 55% increase in expenses in its most recent quarter.
Zoom in: SpaceX CEO Elon Musk told investors on an earnings call Tuesday that the company now expects to reach $1 trillion in revenue by 2030, if not 2029, up from a previously projected 2031.
- But his extensive commentary about the investments necessary to get there unnerved investors.
- That includes rocket development, AI data centers, power deals — with compute capacity alone expected to hit 5 gigawatts to 10 gigawatts by the end of 2027, Musk said.
Yes, but: A strong cloud businesses could make a difference, the Wall Street Journal recently noted.
- Amazon, Microsoft and Google have all rattled investors with eye-popping AI spending, but strong cloud results and massive backlogs of contracted demand have given their shares a recent boost.
The bottom line: "Investors have become increasingly discerning," according to Ed Yardeni, president and chief investment strategist of Yardeni Research.
- "Instead of investing on faith, they've been assessing company by company whether future demand might be huge enough to justify the massive capex devoted to data center buildouts."
