The first earnings season of 2025 is kicking off in full swing, with Big Tech in the spotlight starting next week. Microsoft and Meta’s quarterly reports are due on January 29th, followed by Alphabet on February 4th.
Two questions are likely to be a focal point during Big Tech’s results – how have AI investments been paying off in terms of revenue and contribution to growth, and what will AI investments look like for 2025? Microsoft has been more forward as to where AI spending will land in 2025, noting that it would be investing $80 billion towards AI data center capacity this year. The recent rounds of earnings, more specifically in August 2024, saw heightened scrutiny from analysts over the ROI from AI capex, and it’s likely that this theme persists this quarter.
2024 Capex Blew Estimates Out of the Water; 2025 Likely to Follow
Big Tech’s capex in 2024 blew estimates out of the water, coming in much higher than expected, with 2025 likely to follow as Microsoft has already signaled AI-data center capex 42% higher than estimated.
Analysts had initially estimated capex of ~$200 billion for Big Tech in 2024, an increase of ~30% YoY. 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. Our latest checks suggest that Big Tech is on track to spend at least $236 billion in capex in 2024, 18% higher than analyst estimates and representing YoY growth of more than 52%.
For 2025, capex is likely to follow a similar strong growth trajectory, as companies have already signaled a willingness to invest substantially more this year predominantly for AI. Analysts are currently forecasting growth in the $280 billion range, up ~20% to 25% YoY, though we believe capex could surpass $300 billion in 2025.
The primary takeaway here is that there is alpha in AI hardware and data center suppliers when capex comes in much higher than expected, as more money is flowing beyond Nvidia to the outer reaches of the ecosystem.
AI Stocks Rise as US Nods Towards $500 Billion in AI Infrastructure
Earlier this week, the US government unveiled plans to spend up to $500 billion on AI infrastructure under a project codenamed Stargate. Consisitng of Oracle, OpenAI, SoftBank, and MGX, working alongside tech partners Arm, Nvidia, and Microsoft, the project is said to start with an initial $100 billion commitment before potentially scaling to up to $500 billion in investment through 2029. Arm, Microsoft and Oracle all surged on the news.
Stargate will focus on building out AI infrastructure for AI model development and deployment, breaking ground in Texas on the first data center. This is not necessarily new, as Stargate was first discussed in April 2024 by Microsoft and OpenAI as the fifth and final stage of a supercomputer buildout focusing on a 5GW data center operational by 2028.
Meta Stock’s Capex to Surge in Q4
Capex will continue to be in focus for Meta, as higher than expected spending forecasts have impacted shares in the past, especially as ROI for AI investments is not as crystal clear as the hyperscalers. Meta is aggressively investing in compute and data center capacity as it continues developing its Llama family of models, fine-tuning its feed to boost engagement and increase time spent on apps, and optimizing ad delivery.
Management explained that they “expect servers will be the largest driver of growth in 2025 and remain the largest portion of our overall CapEx budget, though we also expect higher spend in data centers and network equipment as we continue to just scale our overall infra footprint.” To note, Meta was among the largest deployers of custom silicon in 2024, with an estimated 1.5 million of its MTIA accelerators deployed alongside ~224,000 Hopper GPUs purchased. Management added that they “expect growth in non-AI capacity as we invest in the core business, including to support a higher base of engagement as well as refreshing existing servers, as well as AI capacity as we scale Gen AI training and continue to invest meaningfully in core AI.”
Through Q3, Meta’s capex totaled $24.4 billion, implying capex spend is rising from $9.2 billion in Q3 to $14.6 billion in Q4 to reach the midpoint of Meta’s $38-40 billion guide. Management was clear on expecting “significant growth” in 2025, with servers the largest driver (and largest portion of spending) followed by data centers and networking. Meta will likely provide an initial capex guide for FY25 in the upcoming report, with the level of growth in focus following ~40% implied growth in FY24.
For a deeper understanding of Big Tech’s capex and trajectory past one-quarter trillion in spending this year, read AI Spending To Exceed A Quarter Trillion Next Year.
Meta Says Generative AI Growth is Early
Q4 is expected to wrap up a strong growth year for Meta, with revenue projected to increase 17.1% YoY to $47 billion, at the higher end of management’s $45 billion to $48 billion range, with EPS increasing 26.5% YoY to $6.74. For the full year, revenue is expected to rise 20.8% with EPS increasing 52.5%.
GenAI is not expected to be a meaningful contributor to revenue in FY24, per Meta’s management, but core AI, used for improvements in ad engagement and performance, has been driving revenue gains. Meta is capitalizing on improved ad pricing, driven by increased ad demand fueled by improved ad performance – a result stemming both from AI integrations for advertisers and optimizations to its AI-driven feed.
This is offsetting slowing growth in ad impressions as Meta laps strong double-digit growth. For example, Meta acknowledged that improvements to its AI-driven feed “led to an 8% increase in time spent on Facebook and a 6% increase on Instagram” in 2024, which boost ARPU (no longer reported geographically) with more ads (and higher priced ads) served.
Alphabet Lag AI Stock Peers in Capex
As expected, capex will be a focal point for the Q4 call, as Alphabet will provide more color on FY25’s planned spending. For FY24, capex is expected to increase nearly 60% YoY to just over $51 billion, with Alphabet signaling that 2025 will increase YoY, but “likely not the same percent step-up that we saw between ’23 and ’24.” This opens the door for a wide range of possibilities – Alphabet could scale towards $20 billion per quarter by year-end and boost capex ~40% YoY, or hover around the $15 billion/quarter market, for an increase of less than 20%.
Alphabet has been significantly investing in its custom chips as well as Nvidia GPUs as it believes that it can offer top-notch performance at a fraction of the cost. Alphabet’s investments in its TPU portfolio, augmented by Nvidia GPUs, is helping reduce operating costs for enterprise clients on model training and inference by up to 70%. Gemini has also been a strong growth driver, with Gemini API calls up 14x YoY in Q3, while token volume, consumer usage, and business adoption all saw “dramatic growth.”
Alphabet Stock Seeing Encouraging AI-Driven Growth
Alphabet has benefited from AI tailwinds in both Cloud and Search, with AI helping Cloud growth accelerate to 35% YoY, a nearly 7 point acceleration since the beginning of 2024. Search momentum has been solid with five consecutive quarters of low double-digit growth, as AI Overview now reaches 1 billion people each month.
For Q4, Alphabet is expected to report 11.9% YoY growth to $96.6 billion in revenue, before maintaining growth in the mid to high-11% range through FY25. EPS growth is expected to be choppy; Q4 is projected to see 29.5% growth to $2.12, while Q1 is expected to see just 7.2% growth to $2.03.
AI is driving new growth for Search, not just via AI Overviews, with ads now being implemented, but also by increasing engagement and Search usage. Management explained in Q3 that AI Overview is increasing overall Search usage and exploring more websites, creating a growth flywheel that “actually increases over time as people learn to adapt to that new behavior.” Management also mentioned that they “see monetization at approximately the same rate” for AI Overview, with additional monetization opportunities in ads via new formats and improved ad targeting.
However, Cloud has been a brighter spot for Alphabet, with revenue growth of 9.7% QoQ and 35% YoY in Q3, its sharpest acceleration in two years. AI has aided Cloud growth, with CEO Sundar Pichai saying AI helped “attract new customers, win larger deals, and drive 30% deeper product adoption with existing customers.” Cloud is also seeing its operating margin improve significantly – the segment reported a 19% operating margin in Q3, up from 11% in Q2, as operating income rose 66% QoQ to $1.95 billion.
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