Markets
Wall Street drops on AI spending worries as Intel falls 28.6%
The S&P 500 had its worst day since June as Intel, Amazon and Nvidia fell and investors questioned how much the big tech companies are spending on AI.
Stocks fell hard on worries that AI spending is too high, giving the S&P 500 its worst day since June. The index dropped 1.8% and closed a third straight losing week, The Associated Press reported.
The Nasdaq composite fell 2.9% on Oct. 30, and the Dow lost 572 points, or 1.1%.
Intel, Amazon and Nvidia Take the Hits
Intel fell 28.6%, its worst drop since 1974, after forecasting fourth-quarter profit below analysts’ expectations. CEO Lip-Bu Tan said the PC industry continues to feel pressure, though Intel’s quarterly profit beat expectations.
Amazon fell 1.4% after reporting weaker summer profit than analysts expected. Over the prior 12 months it burned through $42.4 billion of cash by the free cash flow measure, after spending $94.8 billion on property and equipment, primarily AI. Nvidia fell 4.2% and was the biggest drag on the S&P 500.
A day earlier, Alphabet dropped more than 12%, its worst day on record. It had told investors it burned more cash in summer than in spring, citing AI investment.
Investors Ask for Returns on $828 Billion
Amazon, Alphabet, Microsoft, Meta and SpaceX, which includes xAI, are set to invest as much as $828 billion in capital spending this year, Fortune reported Oct. 31, based on their earnings releases and calls. Four of the five had negative free cash flow in the third quarter. Microsoft did not.
Meta’s free cash flow was negative $2.1 billion last quarter, and it plans to issue new shares to raise up to $95 billion. Microsoft announced a $25 billion bond offering, its first bond sale in more than nine years.
“We’re moving out of the hopes and dreams phase of the AI trade and into the ‘show me’ phase,” said Joe Tigay of Equity Armor Investments. On Amazon’s Oct. 29 earnings call, CEO Andy Jassy said spreading the spending over 25 years “might be more convenient, but that’s not the world that we live in, and that’s not the opportunity.”
Cloud revenue is growing fast at the same companies. Google’s cloud revenue more than doubled last quarter, Microsoft’s Azure grew 48% and AWS grew about 39%, Fortune said. Not all of that comes from AI.
The U.S. stock market remains 3.1% below its all-time high. Midterm elections are Tuesday, and AP said worries about AI have become a concern for voters across parties.
What It Means for the Labs
We think the hyperscalers’ spending is what the labs rent. Anthropic filed paperwork for an IPO this week, which drew attention to more than $265 billion in minimum purchase commitments, mostly for cloud computing and infrastructure, Fortune reported. Amazon’s AWS backlog grew to $578 billion and includes a new agreement with OpenAI, CIO Dive reported Oct. 30. That puts the labs’ compute in the hands of companies whose investors have only now begun asking about payback. The arrangement holds for the labs as long as those companies can keep funding the buildout while shareholders wait for returns.