Big Tech is spending big on the AI arms race.
The Big Tech companies — Amazon, Microsoft, Google, Meta, and Apple — are on track this year to spend a combined $200 billion on buying and maintaining fixed assets like real estate and equipment, according to a Bernstein research note.
In the next five years, spending by Big Tech on fixed assets — also known as capital expenditures, or capex — could surpass $1 trillion, Bernstein analysts said. The majority of Big Tech's capital expenditures go toward technical infrastructure such as land, data centers, servers, and networking equipment.
In the coming years, these companies will focus spending on the GPUs and data centers needed to support Big Tech's generative artificial intelligence ambitions.
"AI has been an investment topic for 18+ months now, yet the scale of this investment cycle still surprises," Bernstein analysts wrote in the note.
Bernstein's estimates represent a sharp increase in spending for Big Tech, which has spent the last two years cutting costs, including shedding assets like real estate. Big Tech companies have spent about 10% of annual revenue on capex costs in recent years. That percentage will jump to 14% or 15% in the next two years.
The analysts said the $200 billion Big Tech companies are projected to spend this year surpasses what the next 90 telecommunications companies in the S&P will spend on these types of assets altogether next year.
This isn't the first time an industry's largest companies have collectively increased capex spending. The analysts said that this "concentrated spending" level is similar to that of Big Oil companies like Exxon, Chevron, Total, Shell, and BP, which spent $166 billion in 2013.
Wall Street didn't tolerate Big Oil's big spending for long. By the end of 2013, investors called for those companies to stop spending on megaprojects and return some of that money to shareholders.
That kind of blowback may not happen for Big Tech.
"If Big Tech doesn't invest, they leave themselves exposed to disruption," Bernstein analysts wrote.
Big Tech's profit margins in the coming years could be further strained by head count and overhead costs if companies prioritize hiring new employees for AI initiatives instead of reallocating existing workers.
The Bernstein analysts noted that previous periods of heavy investment by Big Tech have lasted one to three years, but this cycle might be longer.
"Perhaps we'll hit an air pocket in demand at some point, but if AI is really the next generation of the internet, expect investment intensity to remain elevated for longer," the analysts wrote.
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