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In their quest to fill rural America with massive, windowless data centers, U.S. tech firms are making capital-intensive investments in artificial intelligence. If that doesn't repay, the rise in investments could weigh on profit margins for years.
The enthusiasm for generative AI implies that post-pandemic cost-cutting programs have given method to investor-approved spending plans. Earlier this 12 months, Meta announced a brand new $800 million data center in Indiana. Alphabet is planning a $3 billion project to determine an information center campus in Indiana and expand capability in Virginia. Microsoft plans to create a $3.3 billion “hub for AI” in Wisconsin. International projects include Amazon's billion-dollar plans in Germany and Singapore. Like custom chips, data centers are intended to function a protective wall for cloud computing and AI services.
The result is a rise in capital expenditures, most of which go to plant, property and equipment. Between the tip of fiscal years 2019 and 2023, gross PSA at Meta and Microsoft greater than doubled. At Amazon and Alphabet it has almost doubled.
Apple is an outlier, with its PPE increasing by lower than a 3rd between 2019 and 2023. The company has yet to choose on its generative AI strategy and has been punished accordingly within the markets. It's possible that spending will increase if Apple decides to offer AI services to customers.
Data centers, which might be the dimensions of several football fields, are expensive to construct and maintain. According to McKinsey, power consumption for U.S. data centers will greater than double between 2022 and 2030. Hardware needs to get replaced and updated over time.
Capex forecasts show that spending plans are still accelerating and will probably be reflected in rising depreciation costs. Alphabet expects annual capital spending this 12 months could reach nearly $50 billion. This also applies to Microsoft. In each cases, that may be a rise of about 50 percent over 2023. Amazon, which cut spending last 12 months, expects capital spending in the primary quarter could possibly be on the low end of the 12 months at $14 billion. That suggests annual investment could rise by not less than a tenth, even though it shouldn’t be yet back to pandemic-era highs.
Profit margins are currently holding up. The positive year-on-year profit growth was supported by cost reductions elsewhere and helped by firms extending the expected lifespan of their equipment. Last 12 months, for instance, Alphabet and Meta increased the estimated lifespan of their servers from 4 to 5 and 6 years, respectively. However, the associated increase in net income can’t be repeated. To fuel the info center boom, firms need revenue from AI services, not cost savings.
