Meta (META) and Microsoft (MSFT) stocks took a significant hit Thursday, highlighting growing investor caution around rising capital expenditures in artificial intelligence (AI).
Meta dropped over 4%, while Microsoft fell more than 5% in trading, even though both companies reported stronger-than-expected quarterly earnings and revenue. The downturn underscores an evolving investor focus from current profitability to the costs these companies are incurring in their AI divisions.
Both Meta and Microsoft are investing heavily in AI infrastructure to stay competitive, as generative AI has become an essential area of focus for Big Tech. However, CFOs from both firms indicated that these expenses will not be tapering off anytime soon. Meta CFO Susan Li stated that capital expenditures would increase again in 2025 to fuel growth in AI-driven products and services. Microsoft CFO Amy Hood emphasized “growing demand” as a driver for their continued investments, despite the short-term impact on the company's gross margins. For investors, these financial commitments have become a double-edged sword: they fuel long-term growth but potentially squeeze near-term profits, placing pressure on the stocks of companies even as demand remains robust.
Microsoft's Capacity Constraints and the AI Demand Boom
Microsoft’s Q1 earnings report delivered an impressive 16% revenue increase year-over-year, fueled by steady growth across its core business lines, particularly cloud services. However, its second-quarter revenue guidance failed to meet analysts' expectations, which dampened investor enthusiasm. One of the primary reasons cited was Microsoft's capacity to fulfill demand for its AI services, particularly as the company faces delays in receiving essential AI chips needed to build data centers.
CEO Satya Nadella addressed these constraints on an earnings call, saying that the rapid rise in AI demand had outpaced their ability to expand capacity. "Data centers don’t get built overnight,” Nadella stated, noting that external factors, such as delays in chip supply chains, have created obstacles. Microsoft’s capital expenditures for the quarter nearly doubled from the prior year, totaling $20 billion. This spending reflects an urgent need to expand infrastructure to keep up with the surging demand for AI products, though it comes at a cost to immediate margins. Hood reassured investors that, by the second half of fiscal 2025, new data centers will help meet demand, particularly in the cloud division. If successful, the infrastructure build-out could turn Microsoft’s short-term supply chain headaches into future revenue growth as capacity opens up.
Meta’s AI Expansion and Increasing Capital Expenditures
Meta’s earnings report also underscored how critical AI has become to its business model, particularly within its advertising ecosystem. Meta reported substantial revenue growth, driven by enhanced AI-driven ad targeting, which has attracted advertisers by improving ROI and user engagement across its platforms. However, the company’s AI spending has also climbed, reaching $9.2 billion—a 36% year-over-year increase. This elevated spending signals a broader ambition within Meta to integrate AI capabilities into its core social media platforms, as well as into developing products like Llama 4 (its advanced AI language model) and new augmented reality applications.
CEO Mark Zuckerberg has stated that Meta’s commitment to AI will intensify in 2025, as the company aims to bring more AI-powered tools and products to market. Meta’s CFO recently raised the full-year capital expenditure guidance from $37 billion to $38 billion, illustrating the scale of these investments. Although some investors view these rising costs warily, analysts point to the potential long-term gains. Meta’s AI products are already enhancing its competitive edge, particularly in advertising, where AI-driven targeting is yielding higher ad impressions and better returns on ad spend. Despite the short-term dip in stock price, many analysts are cautiously optimistic that Meta’s heavy AI investments will drive greater returns, although these benefits may take several quarters to materialize.
Conclusion
The story of Meta and Microsoft underscores the delicate balance between growth and spending that Big Tech faces in the era of AI. Both companies are doubling down on AI to maintain their competitive positions and drive innovation, yet investors remain cautious. For Meta and Microsoft, the challenge lies in convincing Wall Street that these long-term investments will indeed yield the returns they envision, even as immediate profits are affected.
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