This article was originally published on Forbes on ForbesForbes on Nov 14, 2024, 05:29pm EST
Big Tech’s AI spending continues to accelerate at a blistering pace, with the four giants well on track to spend upwards of a quarter trillion dollars predominantly towards AI infrastructure next year.
Though there have recently been concerns about the durability of this AI spending from Big Tech and others downstream, these fears have been assuaged, with management teams stepping out to highlight AI revenue streams approaching and surpassing $10 billion with demand still outpacing capacity.
Below, I take a look at the growth in AI spending from Big Tech this year and yet, as it quickly approaches the quarter-trillion mark, and next week, I’ll discuss exactly what this means for the market’s biggest beneficiary.
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AI Capex Accelerating
Big Tech’s AI-fueled capital expenditures serve as a barometer for the broader AI industry, as Microsoft, Meta, Alphabet and Amazon are among the first to recognize multi-billion dollar revenue streams from AI and generative AI offerings. The four are also leading the charge by pouring billions each quarter towards AI infrastructure, signaling that they are still attempting to catch up to AI demand and invest more aggressively in AI come 2025.
To better understand the trajectory of AI spending, let’s take a step back to 2023, where the rapid ascent of ChatGPT at the beginning of the year set the stage for AI to quickly step into the spotlight.
In the first half of 2023, Big Tech spent ~$74 billion on capex. Through Q3, that sum had moved up to ~$109 billion.
In the first half of 2024, Big Tech spent nearly $104 billion, a 47% YoY increase. Through Q3, that sum had surged to $170 billion, up 56% YoY.
So far in 2024, Big Tech has spent nearly $171 billion on capex, predominantly for AI infrastructure, up 56% from 2023.
Source: I/O Fund
To understand why these four are accelerating spending this year and laying the groundwork for even higher spend in 2025, consider this: why is Big Tech spending billions on AI infrastructure globally? Why is Big Tech procuring GPUs en masse or building out custom silicon to deliver AI services in the cloud to millions of enterprise customers?
The answer is three-fold:
1) AI is expected to have a multi-trillion dollar economic impact globally, with a recent estimate from IDC placing AI’s cumulative potential impact through 2030 at $20 trillion. The mobile economy, which sprouted a handful of the trillion-dollar tech behemoths of today, added approximately $5.7 trillion to the economy in 2023. Big Tech’s leaders are well aware of how critical it is to capture and capitalize on an opportunity of this magnitude, and will not miss it.
2) Developing larger models and doubling model sizes requires massive computing power that only Big Tech can afford to develop, meaning a majority of genAI progress is likely to be made primarily in the hyperscalers’ clouds.
3) Big Tech is already realizing AI-related gains, with three of the four saying AI revenue is at least in the mutli-billion dollar range. With millions to billions of users for products to either enhance with AI integrations or target with AI features in subscriptions, the long-term revenue opportunity could dwarf some of their leading revenue streams of today.
I had said in May this year that Big Tech “will likely commit upwards of $200 billion, maybe even $210 billion, combined in capex this year, predominantly for AI infrastructure – from data center construction and expansion, to GPU procurement and custom silicon efforts and more.”
However, that figure is already likely too small, given the pace of acceleration seen in Q3 and commentary for Q4 and full-year spending. Combined, Big Tech spent $64.9 billion in Q3, up 11% QoQ. This increase was driven primarily by Amazon, which boosted capex by ~$5 billion sequentially.
Big Tech spent $64.9 billion on capex in Q3, up 11% QoQ and accelerating to 68% YoY. Source: I/O Fund
Microsoft and Amazon combined for $42.6 billion in capex in the third quarter, with Alphabet maintaining its ~$13 billion/quarter rate and Meta beginning to accelerate its spending.
Amazon signaled in Q3 that it was expecting to spend $75 billion on capex this year, with Meta tightening and raising its capex guide to $38 billion to $40 billion – alone, the two are expecting to spend nearly $115 billion in 2024. To meet that target, combined capex from the duo will need to be nearly $35 billion.
Alphabet is expecting Q4’s capex to be relatively in-line with Q3’s as it maintains its pace for ~$50 billion in full year spend, while Microsoft did not lay out a concrete picture for capex this year. Assuming spend is flat sequentially for Microsoft, the two would be spending ~$33 billion in Q4.
Putting this all together, Big Tech could spend another $70 billion in Q4, overwhelmingly for AI infrastructure, putting full year capex at ~$240 billion, or nearly 15% higher than the level they were tracking for at the start of the year.
The I/O Fund will spell out what this means for the biggest beneficiary of this trend in next week’s newsletter – make sure you don’t miss it.
Come 2025, this AI-driven capex surge is set to stay, with executives foreseeing lasting AI demand and a need to still invest to capture growth and meet demand.
Executives Signal AI Demand is Lasting, Requiring More Spend
I want to reiterate this quote from May’s newsletter, Big Tech Q1 Earnings: AI Capex Increases As AI-Related Gains Continue, as it continues to remain relevant for investors: it is no surprise that Big Tech is boosting spending by more than 50% versus 2023 “given positive outlooks on AI’s potential to drive revenue growth in the billions and how demand continues to outstrip GPU supply.”
This theme was evident across Big Tech’s Q3 earnings calls. Listen to what executives had to say:
Microsoft: Microsoft spent close to ~$10 billion this most recent quarter on GPU and CPU servers, primarily to meet cloud demand, with management signaling that “demand continues to be higher than our available capacity.”
CFO Amy Hood explained that Microsoft expects capex “to increase on a sequential basis, given our cloud and AI demand signal,” as they aim to stay aligned with demand signals. Microsoft also “announced new cloud and AI infrastructure investments in Brazil, Italy, Mexico, and Sweden as we expand our capacity in line with our long-term demand signals.”
Hood further clarified that Microsoft has confidence that as they “get a good influx of supply across the second half of the year, particularly on the AI side that we'll be better able to do some supply-demand matching and hence, while we're talking about acceleration [in Azure] in the back half.”
Amazon: Amazon CEO Andy Jassy said that AWS has “more demand that we could fulfill if we had even more capacity today,” and that “pretty much everyone today has less capacity than they have demand for, and it's really primarily chips that are the area where companies could use more supply.” He explained that AWS is growing rapidly in AI, but he believes “the rate of growth there has a chance to improve over time as we have bigger and bigger capacity.”
What Jassy is saying is that AWS and Microsoft are not the only supply-constrained firms, with Alphabet, Oracle, and others all struggling to meet demand because they cannot purchase enough GPUs or deploy enough custom accelerators alongside GPUs to meet demand.
Jassy also dropped a big clue on long-term demand and AWS’ need for rapidly increasing AI investments. He said that he thinks AI is at an “earlier stage [and] more fluid and dynamic than our non-AI part of AWS,” and customers not “showing up for 30,000 chips in a day. They're planning in advance. So we have very significant demand signals giving us an idea about how much we need.”
