Big tech companies’ earnings season was dominated by AI capital spending forecasts, surprising investors and hurting the stocks of Amazon, Microsoft, and Google (AMG).
This short-term drama makes it difficult to think clearly about the long-term trajectory of AMG’s business. To take a step back from volatility, I use a framework called “KGB” that presents three scenarios for the future of hyperscaler capex.
I’ve worked in the technology industry for decades and have written several books on cloud computing and open source software. I have hands-on experience working on major cloud projects at VMware and Capital One. Here are my suggestions for how to think about this unprecedented wave of AI investments.
K: Follow the Jones family.
In this future, AMG is in an arms race, with each company actively investing money to keep up. A more charitable version says executives believe failure to integrate AI poses an existential threat and will do everything they can to avoid becoming the next Digital Sears. Skeptics see this as reckless competition, burning cash for bragging rights, with tears and big losses inevitable.
G: Goldilocks
Here, AMG’s spending ends up being “just right” to meet customer demand. These companies have unparalleled visibility into future AI usage, including real-time telemetry, signed long-term contracts, and ongoing corporate negotiations. From this perspective, increased capital spending simply reflects confidence in durable demand and reliable profitability.
B: Boat
Like the scene in Jaws when the police chief finally sees a giant shark and murmurs, “We’re going to need a bigger boat.” In this scenario, no matter how much AI capability AMG builds, it will be quickly absorbed. Supply of chips, servers, power, and data centers remains a binding constraint, not demand. The problem isn’t waste. It’s about not being able to consume it fast enough.
A scene from the movie “Jaws” BANG Showbis (via Reuters Connect)
scale issues
Now, K and B factions are locked in a noisy brawl, while G’s supporters look on in bewilderment. Part of the disagreement stems from how difficult it is to gauge the size of these businesses.
Amazon’s cloud business, AWS, has annual sales of about $142 billion and is growing 24%. This means more than $34 billion in increased revenue next year alone. Microsoft Azure and Google Cloud are in second and third place, but they are still giant companies backed by the financial muscle of their parent companies that print money.
Also, most observers are unaware of the enormous social and economic changes that are supporting this growth. The world is in the midst of a decades-long transition from analog to digital processes, and future growth is highly anticipated. AI is just the latest addition to this trend, following the rise of the internet, cloud computing, and enterprise software adoption. AMG is benefiting from a huge trend that will continue for years, if not decades. So it may not be reckless to spend more than $600 billion on capital spending this year.
This is not 2022
There are obvious strategies to calm the market. In 2022, after pandemic-era construction overhang spooked investors, AMG executives pledged financial discipline, made some cost adjustments, and watched the stock rebound impressively over the next two years. We could have done the same thing this quarter. It means putting a lid on capital spending, citing supply chain constraints, and promising to revisit it later. Maybe Goldilocks’ rescue would have boosted their stock.
Obviously, AMG didn’t do that. They have taken capital investment planning to an amazing new level. These companies are run by the same executives who survived the 2022 funding crisis. Their compensation is heavily based on equity, so they just took a big hit again. The fact that they chose to increase capital spending anyway should give observers pause. It suggests a confidence based on knowledge that outsiders don’t have.
Maybe this is Jaws’ moment. Perhaps the demand is so strong and the visibility so clear that AMG realizes the real risk is not overspending. They showed up to hunt sharks without a boat big enough.
Bernard Golden is the CEO of Navica, a Silicon Valley-based technology analysis, consulting, and investment firm.
