Artificial Intelligence is already driving a data center building boom, but the world’s largest tech companies are now indicating they plan to further ramp up development spending in the months ahead.
Meta founder and CEO Mark Zuckerberg speaking at a conference in 2018
This week, Microsoft, Google and Amazon all reported higher-than-expected fourth-quarter revenues from their cloud businesses, a record wave of demand driven in no small part by corporate customers’ growing appetite for their AI products and services.
As AI adoption outpaces expectations, leaders of the three major cloud providers, as well as social media giant Meta, say they will pour even more money into their already swollen data center development pipelines.
At the same time, they are looking to reassure Wall Street that these massive investments aren’t just a hype-driven spending spree. Some analysts have expressed concerns about the quarterly returns these investments are generating, and Google and Microsoft saw their share prices plunge following the earnings releases.
“Our commitment to scaling our cloud and AI investment is guided by customer demand and a substantial market opportunity,” Microsoft Chief Financial Officer Amy Hood said on the company’s earnings call Tuesday. “We’re starting to see the application of AI at scale … people are expecting productivity gains and other benefits that grow revenue.”
Boosted by AI, fourth-quarter enterprise spending on cloud services jumped $5.6B from the previous three months, by far the biggest increase the cloud market has ever seen, according to a report released this week by Synergy Research Group.
Microsoft reported $33B in cloud revenue, up 24% year-over-year, with company officials attributing six percentage points of growth directly to AI services.
Amazon Web Services’ quarterly earnings grew 13% to $24B, with AI-driven revenue accelerating rapidly.
Google saw cloud revenues up 26% year-over-year to $9.2B with what Chief Investment Officer Ruth Porat termed “an increasing contribution from AI.”
These numbers significantly exceeded expectations, analysts said, with enterprise AI adoption happening at a pace few anticipated. According to Microsoft, one-third of its 53,000 Azure AI customers were added in just the last 12 months.
“Cloud is now a massive market, and it takes a lot to move the needle, but AI has done just that,” John Dinsdale, chief analyst at Synergy Research Group, said in an emailed statement to Bisnow. “We expected a Q4 uptick in growth rates, but the numbers came in higher than our expectations. Generative AI is clearly one of the main reasons for the strong performance, as the technology is embraced by cloud providers and enterprises alike.”
Faced with this growing demand wave, tech giants are accelerating a push for the data center capacity needed to support AI, which is already driving record leasing numbers and a larger-than-ever development pipeline.
While Google’s capital expenditures increased to $11B in the fourth quarter, the firm’s leadership is promising “notably larger” capex in 2024 due to increased digital infrastructure investment. Microsoft also predicts accelerated capex to build out AI capacity, while Amazon leadership indicated it expects AWS data centers to drive up overall capex even as the company significantly cuts back spending on logistics facilities and vehicles.
“Capex will go up in 2024,” Amazon CFO Brian Olsavsky told analysts Thursday. “I’m not giving a number today, but expect capex to rise as we add capacity in AWS for region expansions, but primarily for the work we’re doing with generative AI projects.”
Although it is not a cloud services provider, social media behemoth Meta has also been a major investor in AI infrastructure, and the company also plans to significantly increase spending on data center development in 2024 and beyond.
Rather than a response to demand, CEO Mark Zuckerberg told analysts Thursday the accelerated spending is due to a belief that Meta’s AI products will require far more complex models, and therefore far more computing power, than the company initially anticipated.
“We don’t have a clear expectation for exactly how much this will be yet, but the trend has been that state-of-the-art large language models have been trained on roughly 10x the amount of compute each year,” Zuckerberg said.
“We’re playing to win here, and I expect us to continue investing aggressively in this area,” he added.
But even as the big four tech companies tout massive upcoming infrastructure investments, they have also been eager to reassure investors that this spending on the long-term pivot toward AI will also yield short-term bottom-line benefits for other business lines that are critical to the companies’ overall financial performance.
Speaking with analysts, the leadership of all four firms went to great lengths to highlight how AI tools and products enabled by their infrastructure spending are creating value across their companies. Google pointed to AI’s influence in nearly every aspect of its business, from tools to improve engagement for search engine advertisers to AI-assisted production features for YouTube creators. AWS unveiled an AI-powered shopping assistant for its retail business and highlighted how the company’s internal AI chatbot improved productivity.
“Generative AI is and will continue to be an area of pervasive focus and investment across Amazon, primarily because there are few initiatives, if any, that give us the chance to reinvent so many of our customer experiences and processes,” said Amazon CEO Andy Jassy. “We believe it will ultimately drive tens of billions of dollars of revenue for Amazon over the next several years.”
Still, it is unclear if investors are convinced. Despite overall strong results, shares of Microsoft and Google parent company Alphabet plummeted following the release of Q4 results, with analysts citing concerns about advertising revenues and AI spending. Shares in Alphabet slid 6% Wednesday, wiping around $110B off the company’s valuation.
“Investors want to see more contribution from AI,” Gene Munster, a managing partner at Deepwater Asset Management, told Reuters about Alphabet’s revenue.
