We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor.  We ask that you disable ad blocking while on Silicon Investor in the best interests of our community.  If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.
Strategies & Market Trends : The Financial Collapse of 2001 Unwinding

 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext  
From: elmatador5/16/2024 5:00:08 AM
   of 12823
Data centres have turned Big Tech into big spenders

Companies need AI services revenues, not cost savings, to fuel data centre boom Data centres are expensive to construct and maintain

In their rush to fill rural America with vast, windowless data centres, US tech companies are taking a capital intensive bet on artificial intelligence. If that does not pay off, the rise in investment could drag on profit margins for years.

Excitement around generative AI means post-pandemic cost-cutting programmes have given way to investor-sanctioned spending plans. At the start of the year, Meta announced a new $800mn data centre in Indiana. Alphabet is planning a $3bn project to set up a data centre campus in Indiana and expand capacity in Virginia. Microsoft plans to create a $3.3bn “hub for AI” in Wisconsin. International projects include Amazon’s multibillion-dollar plans in Germany and Singapore. Data centres, like custom chips, are intended to act as a moat around cloud computing and AI services.

The result is an increase in capital expenditure, much of it directed towards plant, property and equipment. Between the end of 2019 and 2023 fiscal years, gross PPE at Meta and Microsoft more than doubled. It almost doubled at Amazon and Alphabet.

Apple is one outlier, with PPE up less than a third between 2019 and 2023. The company has yet to choose its generative AI strategy and has been punished in markets accordingly. It is possible that spending will rise when Apple opts to release AI services to customers.

Data centres, which can be the size of multiple football pitches, are expensive to construct and maintain. Power consumption for US data centres 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 show up in rising depreciation expenses. Alphabet has suggested that the annual investment tally this year could be close to $50bn. So has Microsoft. In both cases, this would be about a 50 per cent increase on 2023. Amazon, which cut spending last year, says $14bn in capex for the first quarter could be on the low end for the year. That suggests annual capex could rise at least a tenth, though it has yet to return to pandemic-era highs.

For now, profit margins are holding up. Positive year-over-year earnings growth was supported by cost-cutting elsewhere and aided by companies extending the expected 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 repeated. Companies need AI services revenues, not cost savings, to fuel the data centre boom.
Report TOU ViolationShare This Post
 Public ReplyPrvt ReplyMark as Last ReadFilePrevious 10Next 10PreviousNext