The AI Gold Rush: Tech Giants' Burning Money in a "Survival War"

The AI Gold Rush: Tech Giants' Burning Money in a "Survival War"This week, the tech stock market experienced a dramatic roller coaster ride, with AI frontrunner Nvidia at the heart of the "frenzy." On Tuesday, Nvidia's stock price plunged by 7%, but the next day it surged nearly 13%, adding a staggering $330 billion to its market value

The AI Gold Rush: Tech Giants' Burning Money in a "Survival War"

This week, the tech stock market experienced a dramatic roller coaster ride, with AI frontrunner Nvidia at the heart of the "frenzy." On Tuesday, Nvidia's stock price plunged by 7%, but the next day it surged nearly 13%, adding a staggering $330 billion to its market value. US tech stocks followed suit, with market sentiment fluctuating like a wild rollercoaster.

Nvidia's volatility even surpassed Bitcoin's. Its 30-day implied volatility surged from 48% to 71%, while Bitcoin's DVOL (a metric for 30-day implied volatility) decreased from 68% to 49%. This highlights the immense pressure tech giants face in their AI investments, with growing market concerns about the return on these massive investments.

Shadow of AI Investment Returns

As tech giants released their earnings reports, the performance data unveiled the reality of AI investment: huge capital expenditures didn't align with revenue growth, causing market patience towards AI investment to dwindle, leading to a tech stock downturn.

Earnings reports from multiple tech giants revealed that while AI investment fueled some performance growth, revenue increases fell short of expectations, failing to justify the massive capital expenditures. For instance, although Meta's second-quarter revenue and earnings exceeded expectations, its capital expenditure fell short. While the upper limit of the full-year capital expenditure range remained unchanged, the lower limit was raised by $2 billion. Nonetheless, Meta emphasized its continued commitment to amplifying AI research investment, anticipating significantly increased capital expenditure by 2025 to support AI research and product development.

Microsoft also staunchly declared its continued aggressive AI spending, with a 77.6% year-on-year increase in capital expenditure to $19 billion in the second quarter, almost entirely dedicated to AI-related expenditures. Brett Iversen, Microsoft's Vice President of Investor Relations, stated that the company will continue to increase spending to meet "strong customer demand," projecting higher capital expenditure in fiscal year 2025 compared to fiscal year 2024.

Facing market inquiries about AI investment returns, tech giants provided detailed explanations during their earnings calls, attempting to alleviate investor concerns.

Microsoft focused on discussing AI's growth impact on Azure, highlighting the nearly 60% increase in Azure AI cloud service clients in the recent quarter, accompanied by an average rise in client spending. Microsoft also explained that part of Azure's slowdown stemmed from a GPU shortage, as AI GPU servers were in high demand, limiting Azure AI service capacity. This situation is expected to persist until the end of the year, underscoring the robust demand for AI among enterprise clients.

Meta emphasized the role of AI in propelling its advertising business growth. Mark Zuckerberg highlighted how AI enhanced recommendations, helping people discover better content and improving advertising experiences. These products have scaled up and generated substantial gains for Meta. In the second quarter, Meta's advertising sales jumped by 22%, double the growth rate of its competitor, Google.

Analysts also pointed out that AI strategies revived Meta from its two-year slump. Meta leveraged AI to rebuild its advertising technology stack, transforming the user interface, leading to increased user engagement, ultimately reflected in revenue and profit growth.

Sundar Pichai, CEO of Alphabet, Google's parent company, stated that the company analyzes every dollar invested in AI and witnesses "tremendous momentum" from these investments.

Chip Stock "Frenzy"

The resolute AI investment strategies of tech giants will inevitably lead to higher spending on hardware, including chips, benefiting Nvidia and other chip companies. US tech stocks rebounded significantly overnight, with Nvidia surging 13%, Broadcom rising 12%, ASML ADR gaining 8.89%, and Qualcomm closing up over 8%.

Prior earnings reports revealed that chip giants are accelerating growth riding the AI wave. AMD delivered a spectacular second-quarter performance, doubling data center revenue with AI chips in high demand, exceeding $1 billion in quarterly revenue. TSMC also flourished in the second quarter, exceeding expectations for sales, net profit, and gross margin.

TSMC CEO C.C. Wei stated that the company will more than double the capacity of its advanced chip packaging technology, CoWoS, by the end of 2024. However, even with this expansion, TSMC might not be able to meet client demand until 2025 or 2026. Lisa Su, CEO of AMD, raised the 2024 AI data center GPU revenue forecast from $2 billion to over $4.5 billion. She also pointed out that although capacity will increase in the second half of the year, the AI GPU supply chain will remain "tight" until 2025.

AI Investment: A Survival Issue

However, concerns about AI investment returns might overlook a crucial point: this isn't merely about the incremental revenue generated by specific AI capabilities but about a complete transformation of the entire computing platform, comparable to the shift from mainframes to personal computers in the 1980s.

In this new era of AI computing, every company must upgrade its infrastructure to stay competitive. For businesses, AI investment has become a survival issue rather than a mere pursuit of incremental profit. If competitors can deliver better customer service through AI chatbots or develop products faster and more comprehensively using AI design tools, companies that forgo AI investment will face significant challenges.

Deutsche Bank's analysis observed that, so far, revenue has primarily been confined to the cloud computing realm, where companies train and run AI models. However, beyond cloud computing, signs of return on investment are more qualitative than quantitative, as the return on AI investment is difficult to quantify with concrete numbers.

These observations align with tech giants' previous pronouncements: they'd rather overinvest than underinvest, as falling behind in the tech industry means "having nothing."

Meta CEO Mark Zuckerberg emphasized in a podcast that, to ensure Meta's leadership in AI, the company has spent billions of dollars on Nvidia GPUs to develop and train advanced AI models. He argued that the consequence of lagging behind is being at a disadvantage in the most crucial technology for the next 10 to 15 years.

Google CEO Sundar Pichai echoed similar sentiments: AI is expensive, but the risk of underinvesting is even greater. While Google might be overinvesting in AI infrastructure, primarily in purchasing Nvidia GPUs, the data centers and computer chips they acquire can be used for other purposes if the AI hype cools down. For us, the risk of underinvesting is far greater than overinvesting."

Looking Ahead in the AI Wave

Overall, the latest round of earnings reports indicates that big tech companies remain committed to burning money in this AI wave, while upstream chip companies continue to profit. However, the market remains anxious about the ability to monetize downstream.

The question of AI investment returns remains unanswered. Time and market validation will determine whether tech giants can achieve sustained performance growth through AI technology and ultimately deliver substantial returns to investors.

However, one fact remains: AI technology has fundamentally altered the competitive landscape of the tech industry and will continue to drive technological innovation and industry development in the coming years. The "money-burning game" among tech giants is just beginning. This "survival war" will continue, and the ultimate winners will be those who leverage AI technology effectively and transform it into a market advantage.