Q+A: Big Tech's AI spending is about to be tested
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Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics and more. I'm Michael Thompson. And it is another huge week for global markets. Last week, we heard from Tesla and Alphabet. This week, it's Microsoft, Meta and Amazon's turn to deliver quarterly results. Between them, these companies are spending hundreds of billions of dollars on artificial intelligence, and investors have seemingly been happy to fund the AI boom so far, but at some point, they will want to see a return. Remember, this is general information only, and you should seek advice tailored to your circumstances before making investment decisions. Josh Gilbert is Lead Market Analyst for APAC at eToro.
Josh, welcome back to Fear and Greed Q&A. Thanks for having me, Michael. Good to be with you. Start with last week, shall we? Because it's potentially a bit of a warning for what we might see happen this week. What did we learn from Alphabet?
I think it was a couple of things that we learned. Firstly, they showed us kind of what the market was looking for with this AI trade. They showed real profits from the spending. So if we look at the numbers, it came from Google Cloud. They saw growth of over 80%. Cloud profits more than tripled, saw record margins. So that's really what the market's looking for, is this AI build-out paying off. Its search numbers was also really good, showing it can sort of live alongside AI. That's part of the business that keeps delivering and the AI features are actually driving more searches. The other side of it, though, and basically what overshadowed everything was that its capex guidance went up to as much as 200 billion for this year.
And that's ultimately what sent shares lower last week. And where that's coming from is the amount of money that they're spending each quarter. And ultimately, this quarter or Q2, free cash flow went negative for the first time since Alphabet listed back in 2004. So this is a company that has never burned cash as a public business, and now it is. And they told us that that sort of pressure on that sort of free cash flow is going to continue into next year.
Okay. The pressure on cashflow, just take a step back for me for a second, because the sums that these companies are spending are astronomical, right? And previously we talked about Microsoft, Amazon, Meta, Alphabet forecasting, I think it was 700 billion US dollars in spending in infrastructure in this year alone. And last week Alphabet raised its spend to 205 billion. What are they actually spending it on? Is it on the data centers? Is it on power plants to run them? Is it talent? Is it development of new AI engines? Is it everything within this entire ecosystem?
Yeah, it's everything, right? It's everything that is below the surface, whether that's memory, chips, infrastructure, it's everything below, you know, even the little things, the cabling that goes into the cooling of the data centers, right? And I think ultimately it's coming from a place of... the scale and the sheer demand that we are ultimately seeing from AI. So I think that the big sort of, you know, asterisk to put on Alphabet spending is that it's coming from a place of, you know, demand already knocking at the door. They've got $500 billion in backlog of, you know, customers already contracted. So they're not spending and hoping customers arrive. They're ultimately catching up to those that are basically already there, kicking the door down, asking them to, you know, give us this sort of AI, you know, growth that we're ultimately looking for.
And I think it's two sides. We also had Intel earnings last week as well. And they're one of the beneficiaries of this build out. They just posted its fastest revenue growth in 15 years, says it can't make chips fast enough. So Alphabet cannot build data centers fast enough. You know, we're talking about, you know, memory supply and how tight that is. So every layer of the sort of supply chain is reporting that demand is ahead of supply.
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