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In a rush to fill rural America with vast windowless data centers, American tech companies are making capital-intensive bets on artificial intelligence. If it doesn’t pay off, increased investment could reduce profit margins for years.
The excitement around generative AI means post-pandemic cost-cutting programs have been replaced by investor-approved spending plans. Earlier this year, Meta announced he would build a new $800 million data center in Indiana. Alphabet is planning a $3 billion project to set up a data center campus in Indiana and expand capacity in Virginia. Microsoft plans to build a $3.3 billion “AI hub” in Wisconsin. International projects include Amazon’s multibillion-dollar plans in Germany and Singapore. Data centers are intended to act as moats around cloud computing and AI services, as well as custom chips.
As a result, capital expenditures will increase, much of which will go toward plant, property, plant and equipment, and equipment. Between the end of 2019 and fiscal year 2023, Meta and Microsoft’s total PPE more than doubled. Amazon and Alphabet almost doubled.
Apple is one outlier, increasing PPE by less than a third between 2019 and 2023. The company has not yet opted for a generative AI strategy and has been punished accordingly by the market. If Apple chooses to release AI services to customers, spending could increase.
Data centers can be the size of multiple football fields and are expensive to build and maintain. According to McKinsey, US data center power consumption will more than double between 2022 and 2030. Hardware must be replaced and upgraded over time.
Capital expenditure forecasts show that spending plans are still accelerating, manifesting as an increase in depreciation and amortization. Alphabet has indicated that its annual investment could be close to $50 billion this year. So is Microsoft. In both cases, this will increase by approximately 50% in 2023. Amazon, which cut spending last year, said its $14 billion in capital spending in the first quarter could be the lower end of this year. This suggests that annual capital spending could increase by at least a tenth, although it has not yet returned to pandemic-era highs.
For now, profit margins have been maintained. Positive year-over-year earnings growth was supported by cost reductions in other areas and as the company extended the expected life of its equipment. For example, last year Alphabet and Meta increased the estimated lifespan of their servers from four years to five and six years, respectively. However, this boost to net income is not something that can be repeated. Companies need revenue from AI services, not cost savings, to fuel the data center boom.
elaine.moore@ft.com
