RPT-BREAKINGVIEWS-Big Tech sets stage for AI-budget murder mystery

By Robert Cyran and Jonathan Guilford

NEW YORK, Jan 28 (Reuters Breakingviews) - A time is coming when investors will gather around the corpse of boundless artificial intelligence spending. Microsoft MSFT.O and Meta Platforms META.O kept the players guessing on Thursday when they unveiled another $52 billion of quarterly capital expenditure on servers and chips, and promised more to come. The pace of growth, however, is setting the stage for a dangerous whodunnit.

The tech duo played its cards well, serving up another round of stellar results. Their combined revenue increased by $23 billion. Microsoft boss Satya Nadella and Meta CEO Mark Zuckerberg, who last year said that “superintelligence is now in sight,” will roll the dice again in the wild race to develop better-than-human silicon intellects.

The payoffs from such a breakthrough would probably be vast. Even so, Wall Street analysts expect the outlays to plateau in 2027.

Consider the suspects. There's quiet Average Joan, who relishes cash returns from Big Tech. When Zuckerberg pledged to divert a “notably larger” sum of dollars to capex in October, Meta’s shares tumbled 11%. Just as leery stockholders helped kill his fanciful metaverse, they could have a hand in throttling AI. Both companies already have suffered 25% valuation drops, from nearly 20 times expected EBITDA over the next 12 months for Microsoft to 16 times and from 16 times to 12 times for Facebook's owner.

Roguish newcomers are lurking, too. OpenAI and Anthropic are part of the group threatening more established rivals. Microsoft itself makes vast racks of servers for their use, saying about 45% of its $625 billion in remaining performance obligations, a measure of contracted backlog, is for OpenAI alone. Such links make friends as potentially menacing as enemies. A glut of infrastructure, and greater software competition, might also stick the knife into profitability.

Be leery of antsy creditors, too. After initially spending primarily out of their own coffers, five technology goliaths are on track to borrow $140 billion annually for the next three years, Bank of America analysts estimate. Meta has tapped private credit, signing a $27 billion deal with Blue Owl Capital OWL.N, whose share price has declined as worries mount about potential overextension. In another ominous sign, the annual cost of insuring against database software giant Oracle ORCL.N defaulting on its five-year debt has jumped 300% over the past 12 months.

Equally disturbing are the speculatively built IT storage facilities without any committed tenants. Previous booms have repeatedly resulted in surplus capacity for demand that never materialized.

Any of these culprits, alone or together, could become vicious. Likewise, shadowy troublemakers like material shortages and Chinese competitors might spring from a dark corner. The killer and the victim may yet be unknown, but the parlor game is afoot.

Follow Robert Cyran on Bluesky.

CONTEXT NEWS

Facbook owner Meta Platforms on January 28 reported fourth-quarter revenue of nearly $60 billion, a 24% rise from the same period a year earlier, while software giant Microsoft grew its top line 17% over the three-month stretch to about $81 billion.

Meta’s earnings per share increased 11% to $8.88 and Microsoft's jumped 60% to $5.16.

Both companies sharply hiked their capital expenditure, largely on data centers. Meta invested some $22 billion, about 47% more than the fourth quarter of 2024, while Microsoft invested 89% more, approximately $30 billion.