Big Tech may be breaking the bank for AI, but investors love it

By Aditya Soni and Deborah Mary Sophia

(Reuters) -Big Tech is spending more than ever on artificial intelligence – but the returns are rising too, and investors are buying in.

AI played a bigger role in driving demand across internet search, digital advertising and cloud computing in the April-June quarter, powering revenue growth at technology giants Microsoft, Meta, Amazon and Alphabet.

Betting that momentum will sustain, Microsoft, Alphabet and Amazon are ramping up spending to ease capacity shortages that have limited their ability to meet soaring AI services demand, even after several quarters of multi-billion-dollar outlays.

The results offer the clearest sign yet that AI is emerging as a primary growth engine, although the monetization journey is still in its early days, investors and analysts said.

The upbeat commentary underscores how surging demand for the new technology is shielding the tech giants from tariff-driven economic uncertainty hobbling other sectors.

“As companies like Alphabet and Meta race to deliver on the promise of AI, capital expenditures are shockingly high and will remain elevated for the foreseeable future,” said Debra Aho Williamson, founder and chief analyst at Sonata Insights.

But if their core businesses remain strong, “it will buy them more time with investors and provide confidence that the billions being spent on infrastructure, talent and other tech-related expenses will be worthwhile,” she added.

Microsoft shares rose 4% on Thursday, with the Windows maker crossing $4 trillion in market value – a milestone only chip giant Nvidia had reached before it.

Meta was up even more, rising 11.3% adding around $200 billion to its market value of about $1.75 trillion. Amazon slipped 7% after-market, after rising 1.7% in regular trading, on disappointing cloud computing results.

All the companies have faced intense scrutiny from investors over their ballooning capital expenditures, which were expected to total $330 billion this year before the latest earnings.

And until a few days ago, the Magnificent Seven stocks were also trailing the S&P 500 in year-to-date performance.

SILENCING DOUBTS

Microsoft said on Wednesday it would spend a record $30 billion in the current quarter, after better-than-expected sales and an above-estimate forecast for its Azure cloud computing business showcased the growing returns on its massive AI bets.

The prediction puts Microsoft on track to potentially outspend its rivals over the next year. It came after Google-parent Alphabet beat revenue expectations and raised its spending forecast by $10 billion to $85 billion for the year.