Shareholders of the largest global companies are wondering how to stay at the forefront of AI development. It has become a critical commodity for the technology sector, with investors betting big on a future defined by AI. But now, key players are facing growth capacity, new competition from China, and possibly a transformation of the entire market. How are companies such as Meta, Amazon, Microsoft and Alphabet managing to capitalise on AI? And why do they need to invest hundreds of billions of dollars to stay on top? J&T Bank analyst William George Kubik answers.
The results season was more or less full of emotions. Particular attention was once again focused on the US technology sector, which has been the driver of capital market growth over the past two years, not least because of the high expectations associated with the emergence of artificial intelligence. This was reflected in the results and subsequent movements of stocks such as Meta Platforms, Amazon, Alphabet and Microsoft. In particular, the results of Amazon, Microsoft and Alphabet showed that the current growth of AI infrastructure remains insufficient.
"The lack of speed in building new data centers and reaching maximum chip production capacity are the primary reasons why some hyperscalers are not achieving even higher cloud and AI growth. This was even explained on Alphabet's conference call when Google Cloud growth was slightly below analysts' estimates (+30.1% vs. expectations of 31%). CEO Sundar Pichai also commented that the speed of building their data centers is not keeping up with the demand for their services. In other words, the problem is on the technical supply side," says J&T Bank analyst William George Kubik, who focuses on the technology sector, among others.
Massive investments
Microsoft, Alphabet, Amazon and Meta plan to spend over $320 billion (+30% or +70 billion y/y) on AI development and construction of related infrastructure this year alone, i.e. roughly CZK 7.7 trillion. The leader is Amazon, which plans to invest $95 billion in data centres for Amazon Web Services this year alone, followed by Microsoft with investments of around $85 billion, Alphabet ($75 billion) and Meta ($65 billion).
"Analysts agree that demand will grow, despite initial concerns over China's new AI model DeepSeek. In fact, according to Wedbush and Cantor Fitzgerald, this cheapening will bring demand even from companies that have not had the means to do so," Kubik says. However, he also notes that Deutsche Bank, for example, has warned of possible downgrades in valuations of technology companies as they are priced for perfect growth, which may now get a crack.
The J&T Bank analyst also recalled that companies reported results for the last quarter of last year, just shortly after High-Flyer released its latest DeepSeek model to the public. Thus, expectations for the next period have so far been reflected in the earnings reports rather without any possible impact of DeepSeek.
Nvidia in danger?
Nvidia reported its results last week. Overall, these were very solid results that confirmed that the AI trend continues to be very strong. Nvidia's revenue was $39.3 billion (+78% y/y). The data center segment, which is also the top segment with 90% of total revenue, had revenue of $35.6 billion (+93% y/y, +17.1% q/q), on an estimate of $34.1 billion. This continued to be helped by the strong AI and cloud trend. This suggests that AI continues to penetrate the global economy and demand remains very robust. Gross margin at 73.5% (-3.2pp y/y) was in line with expectations. Its year-on-year decline was due to higher costs associated with the ramp-up of new AI GPU chips in the Blackwell category. This made the market somewhat nervous as it could mean lower profitability for the company. We believe that the concerns are rather premature and that there will be some leveling back in the coming quarters. CEO Jensen Huang noted that demand for Blackwell's new chips is very strong and outstripping supply, as he also previously announced during the 3Q24 results. This, he said, is aided by new rational AI models that need more computing power due to their complexity. Attention also turned to DeepSeek on the conference call. Huang noted that DeepSeek is very positive for the AI trend, as it will make the demand for AI chips even higher as AI becomes both more affordable and more sophisticated.
Recall that Nvidia's value plummeted by nearly $600 billion in a single day after the launch of the new DeepSeek, the deepest drop in the company's value in stock market history. In the long run, however, Nvidia may still emerge as the winner from the entire AI race.
“For example, former Intel CEO Patrick Gelsinger, in commenting on the current developments, mentioned Nvidia in a very positive light, and he believes Nvidia will continue to benefit from the whole situation,” concludes J&T Bank analyst George William Kubik.
By J&T Editorial Board, 10 Mar 2025, available from https://www.jtbank.cz/clanky/investing/technologicke-firmy-nainvestuji-stamiliardy-do-umele-inteligence-stavajici-kapacity-srazeji-zisky
image source: J&T Editorial Board - Shutterstock
