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%.

Meta is expected to report 17.1% revenue growth in Q4 and 14.6% for the first half of 2025.

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.

Meta's ad pricing growth is offsetting slower growth in ad impressions.

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.

Alphabet’s revenue is expected to hover in the mid to high-11% range from Q4 to Q2.

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.

Google Cloud’s revenue growth reaccelerated to 35% in Q3.

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Amazon Ramps Spending With Significant AI Accelerator Purchases

Amazon CEO Andy Jassy has been straightforward with investors regarding AI demand and capacity – he told investors in Q3 that AWS has “more demand that we could fulfill if we had even more capacity,” and that the “rate of growth there has a chance to improve over time as we have bigger and bigger capacity.”  Amazon quickly scaling capex to $22.6 billion in Q3 (up nearly 30% QoQ)), Jassy’s comments about demand, and Amazon’s GPU purchases and ASICs deployments suggest that AWS’ acceleration can continue with significant AI chip capacity coming online to meet demand.

Data from Omdia shows Amazon was a significant deployer of both Nvidia’s GPUs and custom silicon in 2024, purchasing ~196K Hopper GPUs and deploying a combined 1.3 million Trainium and Inferentia chips (comparable to ~430K Hoppers). Amazon also signaled that it was working on deploying its next-gen Trainium 3 in an Ultracluster featuring hundreds of thousands of chips.

Amazon is expecting to spend $75 billion in capex in 2024, suggesting Q4’s capex comes in around $20 billion, or just over a -10% decline QoQ. However, given that Azure is growing 10 points faster and encroaching on AWS’ leading market share, Amazon may respond to Microsoft’s substantial increase in AI investments in 2025, given that it has the cash and cash flows to support said spending.

Amazon’s AWS Is Now the Core Fundamental Driver

AWS will be in focus not only for its significant AI-driven growth, but also for its status as a primary contributor to topline and bottom line growth. As we discussed in Amazon Stock: Nearing $2 Trillion Club From AWS Growth & Ads Catalyst in May 2024, AWS is one of the core contributors to Amazon’s improved fundamental strength, aiding its push towards a 20% gross margin for the first time in history and boosting the bottom line; e-commerce is no longer the main story fundamentally as AWS is contributing the bulk of operating income and aiding margin expansion.

AWS has recorded five consecutive quarters with accelerating revenue growth, from 12% YoY to 19% YoY, with operating income growth >30% in each quarter (and >50% in the last three). This contribution is the main reason that Amazon is expected to see 77% YoY growth in EPS for FY24, well ahead of the 43% estimated growth from October 2023.

AWS revenue growth has reaccelerated while operating income growth has been >30% for five consecutive quarters.

Amazon Capitalizing On High AI Demand, Holiday Sales

Amazon is expected to continue capitalizing on high demand for AI services on AWS, noting that AI revenue has already reached a multi-billion dollar run rate. Outside of AI, an acceleration in online holiday sales growth (from 5.2% YoY in 2023 to 8.6% YoY in 2024), supports solid e-commerce growth for Amazon.  

For Q4, Amazon had guided for revenue of $181.5 billion to $188.5 billion, yet analysts are expecting a much stronger report – of 45 analysts covering the stock, the lowest estimate for Q4 is $185 billion, with consensus at $187.3 billion, on the upper end of the range.

EPS is expected to rise ~48% YoY to $1.48 in Q4, boosted by strong operating leverage for AWS. Given the significant growth in the first half of 2024, Amazon will face tougher comps come Q2 2025 – EPS growth is forecast to decelerate from 41% in Q1 to 12% in Q2.

Amazon’s revenue growth is expected to hover in the 10% range for the next few quarters.

Microsoft Leads AI Stocks With Capex 26.6% Higher Than Estimated

Commentary on AI capex will be in full focus, given that Microsoft announced earlier this year that it expects to spend $80 billion on AI data center construction in fiscal 2025, well ahead of estimates for $63.2 billion in capex. CEO Satya Nadella recently said in an interview with Business Insider that Microsoft is now power constrained, not chip constrained, after buying nearly double the amount of Nvidia’s Hopper GPUs as peers in 2024:

"We were definitely constrained in '24. What we have told the Street is that's why we are optimistic about the first half of '25 which is the rest of our fiscal year. And then after that I think we'll be in better shape going into 2026 and so we have good line of sight.”

Another important factor will be the trajectory of AI revenue. Nadella said last quarter that Microsoft is expecting its AI business “to surpass $10 billion of annual revenue run rate in Q2.” Capacity comments suggest that Microsoft has enough GPUs to continue adding billions in sequential growth for AI, while capex comments suggest it is willing to spend much more than anticipated to keep its lead against peers.

Microsoft’s Stock Sees Downward Revisions Despite AI Revenue Growth

The December quarter (fiscal Q2) is expected to be a challenging quarter for Microsoft, as it battles weaker momentum in gaming, device sales, 365 Commercial products and a slight hiccup for Azure’s growth. The quarter is expected to bring the end of Microsoft’s recent acceleration to high-teens revenue growth, with 11% growth forecasted for Q2; however, it’s important to note that this quarter is typically the lowest due to seasonality. Over the long-term, we believe Microsoft’s lead in monetizing AI in the cloud and with both consumers and enterprises may be insurmountable, as we think it has multiple tailwinds to drive $200 billion in Azure revenue by 2028. Read more here.

Despite being a leader in genAI monetization with numerous monetization outlets, Microsoft guided for a soft fiscal Q2, seeing revenue between $68.1 billion and $69.1 billion, below the consensus estimate for $69.8 billion. As a result of the subpar guide and aforementioned challenges, analyst estimates for both revenue and EPS have declined -- over the past quarter, EPS estimates have been revised down from $3.23 to $3.13, while revenue estimates were lowered from $69.1 billion to $68.8 billion.

Microsoft’s revenue growth is expected to accelerate after a soft December quarter.

AI revenue has been a strong point for Microsoft, as it expects to surpass the $10 billion annual run rate mark this quarter, an incredible growth trajectory from zero to $10 billion in ten quarters. AI contributed 12 points to Azure’s growth last quarter, with its estimated run rate exceeding $6 billion. Growth in AI-driven products has also been strong: Azure Arc customers grew 2x YoY to 33,000, >$100M Azure deals rose 80% YoY, GitHub Copilot subscriber growth accelerated to 35% YoY to 1.8 million paying subscribers, and Copilot on Windows became available on 225M PCs, up 2x QoQ.

AI Stocks Benefit as Capex Comes in Higher than Estimated

2024 showed that capex estimates were ultimately too low, with Big Tech on track to spend 15% to 20% more this year for AI infrastructure than initially estimated. This comes despite fears that these giants are spending more than they can generate to make these investments worthwhile.

However, if you look closely enough at the numbers and the commentary from Big Tech’s executives, there is ROI to be seen from the recent surge in AI spending. AI revenue is already reaching the billions, while growing at the fastest pace of any product in these companies’ histories, which is no small feat. We believe that ROI is likely to become more evident this year as products and cloud revenue streams only get larger.

Due to outsized capex spending and minimal AI revenue, Big Tech isn’t the best way to play AI. Our firm was first to Nvidia’s AI thesis in 2018 for gains of over 4,000% for our Members, and we are now entering small-cap and mid-cap AI beneficiaries that we think will dominate AI growth in 2025. Join us in our next webinar on Thursday at 4:30 p.m. Eastern to hear more on how we are positioned to capitalize on the $300 billion that Big Tech is spending on AI.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

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