Big tech’s billions suggest a recession appears unlikely
That race toward artificial intelligence (AI) dominance we’ve all been hearing about has prompted some of the world’s largest technology companies – Microsoft (NASDAQ:MSFT) and Meta (NASDAQ:META) platforms included – to ramp up capital expenditures (CapEx) to unprecedented levels.
The two tech behemoths (Microsoft generates more profit in three months than the combined total of all the international airlines since 1945), both reported robust revenue growth and improved operating profits in their latest quarter and have doubled down on investments in generative AI.
This follows growing demand. Microsoft, for example, reported that generative AI services contributed about 12 per cent to Azure’s 33 per cent year-on-year growth, suggesting optimism around future revenue is justified.
Meanwhile, if history is any guide, this CapEx surge could carry broader economic implications, suggesting a recession may be further off than some fear.
AI ‘downstreamers’, Microsoft and Meta, share a commitment to growing their AI capabilities, and this is reflected in their eye-popping spending. Microsoft has allocated approximately US$53 billion to capex this year, representing 28 per cent of its revenue – a significant jump from the 12 per cent average over the last decade. Not to be outdone, Meta is also spending, with expected CapEx between US$38 and US$40 billion, or around 24 per cent of projected annual revenue, compared to its historical average of 19 per cent.
This level of investment is unusual, even in the tech world. According to reports, for Microsoft, much of the spending centers on expanding cloud infrastructure to support generative AI services, with a focus on the cooling-intensive, high-performance data centers needed to run advanced models. Meta, too, is enhancing its AI infrastructure, driving efforts to improve the user experience on its platforms and boost advertising effectiveness. This has already begun to pay off, with Meta reporting that AI-driven tools are increasing user engagement and improving advertiser conversion rates by seven per cent.
For all those predicting a recession, high CapEx spending by large corporations is often seen as a vote of confidence in future growth and market demand. Historically, periods marked by increased CapEx, especially in innovation-driven sectors like technology, tend not to coincide with imminent recessions.
For instance, studies have shown that when CapEx as a percentage of gross domestic product (GDP) rises, it’s frequently followed by periods of economic expansion rather than contraction. This pattern holds particularly true in industries undergoing rapid technological advancements, as the investments in capacity and innovation tend to stimulate demand and job creation, providing an economic buffer.
The current spending spree by Microsoft, Meta, and other tech heavyweights like Alphabet (NASDAQ:GOOG) and Amazon suggests recession fears are misplaced. It’s worth being mindful of the fact the tech titans’ substantial CapEx may also benefit a range of industries, from manufacturing to retail, as companies adopt AI-enabled tools to enhance efficiency, streamline operations, and create new business models.
Interestingly, tech share prices reflect a mixed outlook. While Amazon is trading at all-time highs and Meta is just five per cent from its top, Microsoft is 12 per cent below its high earlier in the year, and Google owner Alphabet is 10 per cent down.
Microsoft and Meta’s revenue projections for next quarter were only in line with or slightly below analysts’ expectations. Investors, of course, will demand the staggering CapEx produces an equally impressive return. As we have written about many times before, investors tend to be sceptical about declining asset turnover.
Still, the current widely held belief is that the potential rewards from AI are enormous. Microsoft and Meta are both positioned to leverage AI as a growth engine, whether through cloud services, enhanced social media platforms, or more sophisticated advertising models. As generative AI becomes more integrated into these platforms, revenue from AI services could eventually match or exceed these initial outlays.
Meanwhile, history suggests high CapEx spending by dominant companies can help avoid economic downturns, making the current AI investment wave a potential stabiliser in an otherwise unpredictable market.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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