Big tech is spending billions on cloud infrastructure… but that won’t be enough to boost profits.

Wednesday: The Independent Investor From the desk of Miles Everson: Hi! I hope you’re having a great week so far. Every Wednesday, I talk about various topics about investing. My goal is to help you achieve better gains for your investment portfolio and boost your financial well-being. Today, let’s take a deep dive into big tech’s investments in cloud infrastructure. Continue reading below to know why investment in cloud infrastructure isn’t an indicator of increased profitability in the AI space. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Big tech is spending billions on cloud infrastructure… but that won’t be enough to boost profits. During Q3 2023, Amazon, Microsoft, and Alphabet spent a combined USD 32 billion to build their respective cloud computing infrastructures. For comparison, that’s nearly 50% more than what these companies spent in the same period in 2020. This massive uptick in cloud infrastructure was crucial since it is critical to artificial intelligence (AI). For those of you who might not know, cloud computing is a necessary component of AI since the latter relies on huge datasets to make calculations… and all of that data needs to be accessible around the world, necessitating the use of cloud storage. Besides, with demand for AI soaring and more people using AI, it’s no wonder giant tech companies have been investing money hand over fist. By 2025, overall investments in cloud computing is expected to reach USD 125 billion. Such a massive investment is bound to excite investors, since it signals a huge buying opportunity in the AI space. However, as we’ll explain today, this type of investment won’t make a huge difference by itself. The Truth Behind Cloud Infrastructure Investments Amazon, Microsoft, and Alphabet are building cloud infrastructure specifically for AI use. While this isn’t necessarily a bad thing, the issue with this is that cloud storage is basically a commodity, and since these companies’ respective offerings don’t differ that much from each other, customers will buy based on price. This means these companies are spending billions just to stay competitive. A similar story played out in the 5G space a few years ago… With the launch of the first 5G-enabled device in 2019, the biggest broadband providers went immediately to work to build 5G infrastructure. Telecommunications giants like AT&T, Verizon Communications, and T-Mobile spent nearly USD 50 billion per year to build towers that support 5G broadband. Despite these investments, these companies weren’t able to charge more for their 5G services because they all competed with one another through pricing. This ultimately led to a situation where billions were spent without improving profitability. The result? Telecom stocks that ramped up 5G investments between 2019 and 2021 ended up performing poorly. For example, both Verizon and AT&T shares lost value during this period. Although T-Mobile actually beat the market, it only did so due to its merger with Sprint, another telecommunications giant. Together, these 3 firms averaged a measly 2% return compared with the S&P 500’s 38% gain. This group of telecom stocks remained relatively flat and their 5G investments only helped them in treading water, not generating more business. So, will the same thing happen to Microsoft, Alphabet, and Amazon? Their investments in cloud computing should at least help them grow their revenue, even though these will not help them be more profitable. The number of AI companies are springing up at a rapid pace. In fact, the AI space is projected to grow more than 17% per year through 2030, which means there will be more customers who want to make use of these cloud companies’ services. This doesn’t mean cloud infrastructure is enough to help any of these businesses win the AI arms race. The bottom line? The big winners of the AI sweepstakes will be the companies that bring out the most unique tools and the industries that are more directly linked to AI technology. … and as an investor, you should keep an eye on companies with the most to gain from the AI boom, whether those firms are responsible for creating the technology themselves, or the ones supplying the tools necessary to make AI systems possible. 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