Google's Spending Shock
Earnings season has delivered an unwelcome surprise for investors. Google raised its spending estimate to as much as $205 billion, up from last quarter's projection of up to $190 billion. Even the lower end of Google's new range, $195 billion, exceeds what the company previously forecast as its top spending limit.
While $15 billion might seem like a minor difference, investors see a deeper problem. Google has essentially admitted it cannot accurately forecast its costs, a troubling sign. The company is spending more money than it generates. It also faces competitive pressure from Chinese AI tools and pricing pressure to keep its models affordable.
Spending more than you earn is not a sustainable business practice. The situation becomes worse when you must keep prices steady or lower them. You end up spending more for the same revenue, or even less.
Broader AI Ecosystem Under Pressure
These challenges extend beyond Google. The entire AI ecosystem is feeling the strain. Meta, Amazon, and Microsoft will report earnings this week, and many analysts expect them to announce higher than anticipated spending on data center construction.
Several other factors suggest growing investor unease. SpaceX shares have dropped to roughly half their peak value. Investors are also worried about Oracle's debt from its data center buildout, which serves as the public market's proxy for OpenAI. Nvidia has been involved in deal talks worth a combined three quarters of a trillion dollars.
Nvidia sits at the center of the circular financing in the AI ecosystem, even more so than OpenAI. If Nvidia is pumping more money into supporting the AI buildout, it may indicate that actual demand is weaker than expected.
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Nvidia's guarantee of OpenAI's debt, a deal worth $250 billion, serves as "as much a reminder of funding strain in the AI build-out as it is a demand signal," according to Billy Leung, Global X Management's tech sector investment strategist, speaking to Bloomberg.
Chinese Competition and GPU Concerns
A Chinese startup recently released a new model, and this pattern triggers nervousness every time it happens. China's biggest constraint is supposedly limited access to GPUs compared to US companies, yet its AI systems remain competitive. If this trend continues, it could signal an end to Nvidia's cash bonanza. It may also mean companies are building too many data centers.
Optimists vs. Reality
The author has spoken with many smart people who are more optimistic about the AI boom. For three years, the author has asked how AI companies plan to actually make money and has not received a satisfactory answer. These optimists acknowledge that data centers will likely be overbuilt during this period of exuberance. They also expect many AI companies to die off when the inevitable correction comes. They invest anyway because they believe the survivors will generate more profits than the losses from failed companies.
AI boosters are watching for the market top just like everyone else. They know it is inevitable, even if it is hard to predict in advance. Some investors are clearly getting cold feet about AI and moving their money elsewhere.
The upcoming earnings reports from other big tech companies could reassure investors and ease this period of AI anxiety. On the other hand, Elon Musk has historically been a good indicator of market tops, and SpaceX just went public. Best of luck to everyone.