Tech Giants Inject $650 Billion in AI Race

SadaNews - Four of the largest American technology companies expect their combined capital expenditures to reach around $650 billion by 2026, in a massive spending wave dedicated to building new data centers and providing the long list of devices needed to operate them, including artificial intelligence chips, network cables, and backup power generators.

The spending planned by "Alphabet," "Amazon," "Meta," and "Microsoft," in the race for dominance in the AI tool market that is still in its infancy, represents an unprecedented investment boom during this century.

Data from "Bloomberg" shows that the estimated spending for each company this year is set to record the highest level of capital expenditures for any single company in any year over the past decade.

A Historic Spending Boom Around Artificial Intelligence

To find a historical comparison for the ambitious spending forecasts that coincided with the announcement of the financial results of the four companies in the past two weeks, one must look back at least to the telecommunications bubble of the 1990s. It may even extend back to the era of building U.S. railroads in the 19th century, the massive federal investments in the interstate highway system after World War II, or even the relief programs aimed at stimulating the economy during the "New Deal" era.

The soaring figures, which indicate an approximate increase of about 60% compared to last year, reflect a renewed acceleration in the wave of building data centers around the world.

The race against time to construct these massive facilities equipped with rows of operational servers run by high-cost processors has put additional pressure on energy supplies, raised fears of price increases for other users, and led to increasing frictions between developers and local communities concerned about competition for electricity or water.

This expansion also raises the risk of distorting macroeconomic indicators, as the focus of spending on construction is concentrated among a limited number of wealthy companies that are already capturing a growing share of economic activity in the United States.

Gil Luria, an analyst at "DA Davidson," stated that the four companies "view the race to provide computing capabilities for artificial intelligence as the next market that could be dominated by a single winner or one that captures the largest share," and that "none of them want to be in the loser’s position."

Pressure on Tech Company Stocks

"Meta" announced last week that its annual capital expenditures could rise to as much as $135 billion, reflecting a potential jump of about 87%.

On the same day, "Microsoft" revealed that its capital expenditures in the second quarter increased by 66%, surpassing expectations, while analysts estimate that its total spending could reach about $105 billion for the fiscal year ending in June. This news led to a broad sell-off, marking the second-largest daily decline in market value for any publicly traded company.

For its part, "Alphabet," established in a garage in South San Francisco in 1998, bewildered investors on Wednesday after announcing capital spending forecasts that not only fell short of analysts' estimates but also exceeded spending levels of a large number of American companies, as it plans to inject up to $185 billion. The next day, "Amazon" raised the bar by announcing plans to spend $200 billion during 2026, causing its stock to decline in after-hours trading.

In comparison, total capital spending expectations for the largest American automotive companies, construction equipment manufacturers, railroads, defense contractors, wireless telecommunications companies, parcel delivery firms, along with "ExxonMobil," "Intel," "Walmart," and twenty-one companies spun off from "General Electric," combined is expected to be only $180 billion during 2026, according to estimates compiled by "Bloomberg."

The Physical Expansion of Tech Giants

Each of the technology giants has charted a relatively different path to recover its investments through returns, but their spending is based on a single premise: that generative AI tools, such as "ChatGPT" from "OpenAI" and its competitors capable of generating text and displaying human-like thinking abilities, will play an increasingly important role for people at work and at home.

However, developing the advanced software models that make this transformation possible is an expensive process, as running them requires linking thousands of chips, each sold for tens of thousands of dollars, which explains the inflation of spending. This expansion also hinges on a bet that the final products will lead to steadily increasing revenues in the future.

This spending has also reshaped companies that had minimal physical presence just a few years ago, despite reaching billions of users with their digital services. For most of their history, both "Meta" and "Alphabet" (the owner of "Google") have considered their sleek headquarters and office spaces as the most significant part of their tangible assets, while most spending was directed to salaries and stock grants for engineers and sales teams.

But this chapter has turned. "Meta" spent last year on capital projects more than it spent on research and development, which mostly includes engineers' salaries, for the first time in six years. By the end of last year, the value of property and equipment held by the owner of "Facebook" and "Instagram" reached about $176 billion, nearly five times its level recorded at the end of 2019.

Funding and Resource Bottlenecks Threaten Ambitions

As numbers continue to grow, the capability of these companies to realize their massive ambitions remains in question. Since the pace of data center construction has accelerated, competition has indeed intensified for limited resources, including teams of electricians, cement trucks, and "Nvidia" chips coming out of "Taiwan Semiconductor Manufacturing" (TSMC) factories. Luria said, "Bottlenecks are present today and will continue to be."

There are also questions about how to finance this expansion. Both "Meta" and "Google," which derive most of their profits from digital advertising, alongside "Amazon," the world's largest e-commerce and cloud computing company, and "Microsoft," the largest seller of business software, all hold dominant positions in their sectors and significant cash reserves. However, their willingness to direct large parts of this liquidity towards a future driven by AI applications means that those reserves, along with investors' patience, will face a real test.

Tomaz Tonguz, an investor at "Theory Ventures" and a former employee at "Google," stated that these companies were considered "cash-generating machines," adding, "Now, suddenly, they need this liquidity, even more, and that’s why they are turning to borrowing.”

Tonguz, who published a blog post last year comparing the AI boom to past frenzied investment waves, noted that such booms do not always end with positive outcomes, but he affirmed that they represent "strong catalysts for economic activity" during the upswings.

Rising Spending Concerns Investors

However, it is evident that investors who rushed to buy shares in tech giants over the past year have become more cautious in light of the large jump in capital expenditures.

In some cases, they turned to selling despite the stability of the fundamental activities of the companies, from digital advertising and search engines to e-commerce and productivity software, and despite revenues exceeding expectations.

Steve Lucas, CEO of "Boomi," a company specializing in connecting data and software within enterprises, stated, "What concerns investors? It is certainly the narrative and the analysts’ discourse about the pace at which AI will bring about radical changes in business models."

He added, "I have no doubt about the potential of AI. But I certainly question the timeline and its economic viability."