Data centers have turned big technology companies into big spenders

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In their quest to fill rural America with vast, windowless data centers, American tech companies are making a capital-intensive bet on artificial intelligence. If that doesn’t pay off, increased investment could drag down profit margins for years.

The excitement around generative AI means that post-pandemic cost-cutting programs have given way to investor-approved spending plans. Earlier this year, Meta announced a new $800 million data center in Indiana. Alphabet is planning a $3 billion project to establish a data center campus in Indiana and expand capacity in Virginia. Microsoft plans to create a $3.3 billion “center for AI” in Wisconsin. International projects include Amazon’s multibillion-dollar plans in Germany and Singapore. Data centers, like custom chips, are intended to act as a moat around cloud computing and artificial intelligence services.

The result is an increase in capital spending, much of which goes to plant, property and equipment. Between the end of fiscal years 2019 and 2023, gross PPE at Meta and Microsoft more than doubled. It almost doubled on Amazon and Alphabet.

Apple is an outlier, with PPE increasing by less than a third between 2019 and 2023. The company has yet to choose its generative AI strategy and has been punished accordingly in the markets. Spending is likely to increase as Apple chooses to offer artificial intelligence services to customers.

Data centers, which can be the size of several football fields, are expensive to build and maintain. U.S. data center energy consumption will more than double between 2022 and 2030, according to McKinsey. Hardware needs to be replaced and upgraded over time.

Capex forecasts show that spending plans are still accelerating and will be reflected in an increase in depreciation expenses. Alphabet has suggested that this year’s annual investment could be around $50 billion. Microsoft has done it too. In both cases, this would represent an increase of about 50 percent from 2023. Amazon, which cut spending last year, says $14 billion in capital spending for the first quarter could be the low end. of the year. That suggests annual capital spending could rise by at least a tenth, although it is not yet back to pandemic-era highs.

For now, profit margins remain the same. Positive year-over-year profit growth was supported by cost reductions elsewhere and helped by companies extending the expected useful life of their equipment. Last year, for example, Alphabet and Meta increased the estimated lifespan of their servers from four to five and six years respectively. But the boost this provided to net income is not something that can be replicated. Companies need revenue from AI services, not cost savings, to fuel the data center boom.

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