Is AI Spend the New Streaming Spend?

Meta is down big. Over 15% as I write this in pre-market trading. That's a couple hundred billion in market cap set to be wiped out by what was a... great overall earnings release. Most of the ding can likely be attributed to forward revenue guidance which was below expectations, but clearly some of it is concern about spend as well. This is not new for Meta, but we seemed to be beyond that narrative in the past few quarters as the stock has come roaring back. In walks AI...

Look, unlike crypto, much of which was hyped up nonsense (or worse), AI is clearly the real deal. It's still early and as such, incredibly chaotic, but it just feels like one of those technologies that is going to permeate well, everything, eventually. But that last bit is key: it's going to take time. And relatedly, a lot of resources to get there. Data, energy, and yes, money.

As we're seeing from Meta, and likely the other tech giants over the next couple weeks in their own earnings, the spend is already massive:

But Meta also raised the high end of its full-year capital expenditure guidance from $37bn to $40bn in order to “continue to accelerate our infrastructure investments to support our artificial intelligence (AI) road map”. Last year capital expenditure spending totalled $28.1bn.

$40B up from $37B which itself was already raised from $35B last quarter. I'm sensing a trend – one which is accelerating, no less...

Wall Street may not like this, but Wall Street clearly loves AI. Just look at Microsoft, which is once again the most valuable company in the world. And it has now left long-time title holder Apple in the dust thanks in part to their diverging AI narratives – something which Apple is scrambling to remedy, clearly. And again, I think what Wall Street actually doesn't like with Meta is the weaker revenue guidance mixed with the fact that it's this particular company ramping spend – a company which previously got itself in trouble with Wall Street over spend (around XR) and was subsequently rewarded for cutting said spend.

Said another way: I'm not sure the other players are going to get dinged in the same way for their AI spend. Yet.

I repeat: yet.

I can't help but think about how Wall Street rewarded all the entertainment companies during the pandemic for their streaming strategies and spend. And dinged them if it looked like they didn't have a good story there. Fast forward a few quarters and the same companies were getting slaughtered on Wall Street for said spend. From Disney on down. I would not be shocked to see the same thing happen on the AI front with the tech companies at some point in the future.

Obviously a lot of that will depend on how well said companies are able to monetize AI. That's not happening now – at least not directly at a scale that moves needles for these companies (beyond NVIDIA, of course). Hence why you heard Mark Zuckerberg basically say "just trust me" with regard to the spend paying off down the line. If it doesn't happen in a few quarters for many of these companies, I imagine Wall Street will get antsy, especially if CapEx keeps rising...

Again, that's not to say this spending is foolish. I mean, some of it probably is, but it also is what it is: an arms race. You can't afford not to spend right now, quite literally. But nor was the spending on content by the media companies foolish – it just got to be excessive. Pushed at least in part by Wall Street! Again, it was an arms race. And Wall Street was rewarding those going for it the hardest. Until they weren't. That's the fear here with AI as well.

So what, who cares if a few trillion dollar companies lose a few hundred billion in market cap? Well, everyone might, actually. These are not just random tech companies now. These are the largest companies in the world, with their stocks the largest components of both market indices and mutual funds. If all of these tech stocks get dinged by large percentages, as happened to the entertainment companies, it's going to be a bloodbath.

I wonder if Meta isn't a bit of a canary in the data center for this future. Again, because of their big spending past. The other players should get more leeway. Until they don't.