It’s earnings season, and investors got an unpleasant surprise from Google: an increase on its spending estimate, to as much as $205 billion — from the last quarter’s projection of up to $190 billion. Even the lower end of Google’s new projected range — $195 billion — is much more than the company had previously forecast as its top end spending. Now, look, I recognize that there’s an impulse to say things like “What’s $15 billion between friends?” but from an investor’s perspective, Google has essentially said that it can’t accurately forecast its costs, which is a scary thing. Plus, Google is spending more money than it’s making. And Google is also facing competitive pressures from Chinese AI tools, as well as pricing pressure to keep the cost of its models low.
You don’t have to be a finance genius to figure out that spending more than you make isn’t an ideal business practice. What’s more, increased spending in an environment where you have to either keep your prices static or drop them doesn’t bode well. You’re spending more and getting the same amount back, or — worse — spending more for less revenue.
“A reminder of funding strain in the AI build-out”
These pressures aren’t just on Google. They’re on the entire AI ecosystem. Meta, Amazon, and Microsoft will all report their earnings this week, and there are plenty of people who think they will also announce they are spending more than expected on the data center buildout.
There are a few other things happening at the same time that suggest investors are getting nervous. First of all, people seem to have finally noticed that SpaceX sucks; as of this writing, its shares are worth almost half as much as they were during its peak. Second, investors are nervous about Oracle’s data center buildout debt, and it’s worth keeping in mind that Oracle is the public market’s stand-in for OpenAI. Third, Nvidia has been engaging in rounds of deal talks worth a combined three-quarters of a trillion dollars. Nvidia — even more so than OpenAI — is at the center of the circular financing in the AI ecosystem. If it is pumping more money into supporting the AI buildout, that may be an indication that the actual demand is weaker than expected.
Specifically, Nvidia guaranteeing OpenAI’s debt, a deal worth $250 billion, is “as much a reminder of funding strain in the AI build-out as it is a demand signal,” Billy Leung, Global X Management’s tech sector investment strategist, told Bloomberg.
On top of all that, a Chinese startup released a new model, and people get nervous every time that happens. One reason for that nervousness is that China’s biggest constraint is that they — at least theoretically — don’t have the same kind of access to GPUs as US companies, and yet their AI systems are still competitive. If that is indeed what is happening, there’s an end in sight to Nvidia’s (and other chipmakers’) cash bonanza. What’s more, it may mean that companies are building too many data centers.
I’ve spoken to a lot of smart people who are more optimistic than I am about the AI boom. (I have been asking how AI companies plan to actually make money for three years now, and I still have not received a satisfactory answer.) All of them think we will likely overbuild data centers during this period of exuberance. They also think that a lot of AI companies will die off when the inevitable correction comes. They are invested in the space anyway because they think the companies that survive will make them more money than they will lose on the ones that die off.
So the AI boosters are watching for the market top just like everyone else; they know it’s inevitable. It’s hard to figure out what the market top is in advance, of course. But some investors are clearly starting to get cold feet about the whole AI thing, and they’re moving their money elsewhere.
We may very well get earnings from the other big tech companies that reassure investors, and this period of AI anxiety will pass. On the other hand, if you’re looking for top signals, Elon Musk is a pretty good one, and SpaceX did just go public. Best of luck to all of us, I guess!