Data Centers Have Made Big Tech Big Spenders - Latest Global News

Data Centers Have Made Big Tech Big Spenders

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In their quest to fill rural America with massive, windowless data centers, U.S. tech companies are making capital-intensive investments in artificial intelligence. If that doesn’t pay off, the increase in investments could weigh on profit margins for years.

The enthusiasm for generative AI means that post-pandemic cost-cutting programs have given way to investor-approved spending plans. Earlier this year, Meta announced a new $800 million data center in Indiana. Alphabet is planning a $3 billion project to establish a data center campus in Indiana and expand capacity in Virginia. Microsoft plans to create a $3.3 billion “hub for AI” in Wisconsin. International projects include Amazon’s billion-dollar plans in Germany and Singapore. Like custom chips, data centers are intended to serve as a protective wall for cloud computing and AI services.

The result is an increase in capital expenditures, most of which go to plant, property and equipment. Between the end of fiscal years 2019 and 2023, gross PSA at Meta and Microsoft more than doubled. At Amazon and Alphabet it has almost doubled.

Apple is an outlier, with its PPE increasing by less than a third between 2019 and 2023. The company has yet to decide on its generative AI strategy and has been punished accordingly in the markets. It’s possible that spending will increase if Apple decides to provide AI services to customers.

Data centers, which can be the size of several football fields, are expensive to build and maintain. According to McKinsey, power consumption for U.S. data centers will more than double between 2022 and 2030. Hardware needs to be replaced and updated over time.

Capex forecasts show that spending plans are still accelerating and will be reflected in rising depreciation costs. Alphabet expects annual capital spending this year could reach nearly $50 billion. This also applies to Microsoft. In both cases, that would be an increase of about 50 percent over 2023. Amazon, which cut spending last year, expects capital spending in the first quarter could be at the low end of the year at $14 billion. That suggests annual investment could rise by at least a tenth, although it is not yet back to pandemic-era highs.

Profit margins are currently holding up. The positive year-on-year profit growth was supported by cost reductions elsewhere and helped by companies extending the expected lifespan of their equipment. Last year, for example, Alphabet and Meta increased the estimated lifespan of their servers from four to five and six years, respectively. However, the associated increase in net income cannot be repeated. To fuel the data center boom, companies need revenue from AI services, not cost savings.

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