Friday, July 19, 2024

Goldman warns Microsoft, Google, and Facebook about the reality of AI amidst the hype.

Goldman Sachs warns of US tech giants’ massive AI spending: A potential bubble in the making

Goldman Sachs Raises Concerns Over US Tech Giants’ Massive Spending on Artificial Intelligence

Goldman Sachs has raised concerns about the staggering amount of money being poured into artificial intelligence (AI) by US tech giants, according to a report by Bloomberg. The report highlights the substantial spending by “hyperscalers” such as Amazon, Meta, Microsoft, and Alphabet, who collectively have invested a staggering $357 billion in capital expenditure (capex) and research and development (R&D) in the past year.

A significant portion of this spending, approximately a quarter of the S&P 500’s total capex and R&D expenditure, is directed towards AI, according to Goldman Sachs’ strategists. Lead strategist Ryan Hammond issued a warning that the companies investing in AI must eventually demonstrate that their expenditures will translate into revenue and earnings. Failure to do so could result in a decrease in the valuation of these companies.

The report also highlights the increasing trend in AI spending among tech giants. Amazon’s capex is expected to reach $63 billion this year, a significant increase from $53 billion in 2023. Meta and Alphabet are also projected to allocate record amounts towards AI investments in 2024.

While the excitement surrounding AI has propelled US stocks to new highs, some investors are approaching the situation with caution. They are considering other sectors like infrastructure and utilities as potential outperformers for the remainder of 2024.

In drawing parallels to the dot-com bubble era, Goldman Sachs’ strategists point out that the current AI spending craze is still relatively modest compared to the excessive levels seen during the tech crash of the early 2000s. Companies back then were spending over 100% of their operating cash flow on capex and R&D, whereas today the figure stands at 72%. However, there are potential risks as the depreciation of AI-related investments could impact profitability negatively.

Hammond underscores the importance of monitoring sales figures to gauge the effectiveness of AI investments, drawing comparisons to the tech bubble era where sales revisions were crucial indicators for investors. This suggests that investors will closely watch for revenue growth to determine if the AI investments are yielding positive results.

As the debate around AI spending continues to unfold, investors will be keeping a close eye on how US tech giants navigate this significant investment landscape.

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