AI hype has propelled the Mag 7 to all-time highs and record-breaking valuations. As each company continues to pour more and more money into AI, investors have become increasingly cautious... fearing similarities between this and the Dot-Com bubble. However, this article will break down why this bubble is different than last tine.
When looking at the earnings reports from Google, Meta, Amazon, Apple, and Microsoft, one message remains clear: spending on AI will only increase.
The Results:
1. Alphabet Inc. (GOOGL)
- Alphabet reported 15% year-over-year revenue increase to about $102.4 billion, driven by both its advertising business and cloud / AI infrastructure growth
2. Amazon.com, Inc. (AMZN)
- Amazon reported revenue growth of 13% in the quarter and net sales hitting $180.2 billion
- Its cloud business, Amazon Web Services (AWS), grew 20.2% year-over-year to $33 billion
3. Microsoft Corporation (MSFT)
- Microsoft posted strong revenue growth of around 18% to $78 billion and operating income up 24%
- “Our planet-scale cloud and AI factory, together with Copilots across high-value domains, is driving broad diffusion and real-world impact," said Satya Nadella, chairman and chief executive officer of Microsoft. “It’s why we continue to increase our investments in AI across both capital and talent to meet the massive opportunity ahead.”
4. Meta Platforms (META)
- Revenue was $51.24 billion, an increase of 26% year-over-year
- Total costs and expenses were $30.71 billion, an increase of 32% year-over-year
- Much of this increase is attributed to an uptick in AI spending
5. Apple Inc. (AAPL)
- Reported quarterly revenue of $102.5 billion, up 8 percent year over year
- Diluted earnings per share was $1.85, up 13 percent year over year
Key Takeaways: Why the Concern if Earnings are Strong Across the Board?
Alphabet, Meta, Microsoft, and Amazon expect to spend a collective $380 billion on capex this year, much of which has to do with AI investment.
Apple is opting for a more "modest" approach, spending only $12.72 billion on capital expenditures in FY 2025.
A lack of true direction on when and where the returns from these billion-dollar data centers will come has overshadowed some of the strong earnings reported from these megacaps. However, the overall reaction from the market was mixed. Amazon and Google soared while Meta suffered its biggest single-day loss since 2022.
Though revenue increased 26% for Meta, their costs and expenses rose 32 % year-over-year. This increase in spending is seen pretty consistently in the Mag 7 and throughout the entire tech industry. With expenses outpacing revenue growth, it's no mystery why Meta stock suffered. This historic spending on a new technology with a promise of future returns is reminding many investors of the Dot-Com bubble. However, this time around is far different.
Why This Time is Different:
Mainly, in the dot-com period, many companies had little to no revenue or profit, raised money based solely on a “.com” or “internet” label, and leveraged heavily. Today, many of the big players in the AI race already have substantial revenue, profitable segments, and strong balance sheets. They are then using this existing cash-flow to fund AI investments as opposed to relying purely on speculative investments from venture capitalists. Real infrastructure investment (data centers, chips, software) shows that systems are being built to support AI development and that this isn't simply a glorified idea.
Thus, the current boom in AI spending shouldn't be a cause for deep concern and I believe that what's to come is very promising. Don't just take it from me... Meta's founder and CEO, Mark Zuckerberg, said "If we deliver even a fraction of the
opportunity ahead, then the next few years will be the most exciting period in our history."