The financial reporting season in the United States is well under way and since most of the largest companies are heavily involved in the technology sector, investors were eager to assess whether and to what extent these companies are benefitting from the surge in interest for artificial intelligence (AI).
In particular, since multiple companies had already committed to substantial capital expenditure that will be dedicated towards AI infrastructure, many questioned whether there will be a shift in the narrative following the launch of the DeepSeek-R1 model that was reportedly developed for around US$6 million, compared to OpenAI’s cost of training GPT-4 of over $100 million.
Despite the market’s initial negative reaction following the emergence of this potential lower-cost Chinese alternative, all major tech firms remained steadfast in increasing AI spending while investors are increasingly questioning the return on investment.
The required AI infrastructure is a combination of advanced hardware and software that enables computers to solve problems by simulating the way humans think. At the core of any AI system is vast data and, therefore, the data centres would include data storage and management solutions combined with processing units that allow for fast calculations. In fact, the clear beneficiaries from AI capital expenditure are a vast range of companies involved in semiconductor manufacturing and custom chip design that enable data storage and processing.
The large data centre facilities would also require a substantial amount of electricity, to the extent that some might need their own power plant. As such, developers of AI data centres do not only require sizable capital for the initial set-up but also face huge operating costs.
Cloud computing offers the ideal platform for data storage and processing since data is made available with minimal delay. In this respect, it is not surprising that all the largest cloud computing providers are investing heavily in AI infrastructure, with the largest three providers being Amazon Web Services, Microsoft Azure and Google Cloud.
Over the past weeks, the parent company of each of these providers stated that their cloud computing businesses are facing capacity constraints since they do not have enough data centres to handle the existing AI demand. In fact, while each of them reported double-digit growth in cloud services, their figures were at the lower end of analysts’ expectations.
The AI theme will remain a dominant factor in the coming reporting periods
Another major investor in AI infrastructure is Facebook’s parent company Meta, which also developed its own large language model called Llama. These four large technology firms are expected to allocate capital expenditure totalling circa $320 billion in 2025, compared to $246 billion last year and $151 billion in 2023.
Amazon is the largest investor with expected capex of $100 billion in 2025, most of which to be allocated for AI, since Amazon Web Services is the largest cloud computing provider in the world. Amazon’s CEO Andy Jassy said this is a “once-in-a-lifetime type of business opportunity”.
Last week, media outlets also reported that the Japanese investment group Softbank is expected to invest $40 billion in OpenAI, making it the start-up’s biggest investor, ahead of Microsoft. Part of the funding is earmarked for a new joint venture called Stargate, which also includes Oracle as an investor. The Stargate project was announced by President Donald Trump last month and includes an initial investment of $100 billion in AI infrastructure, with additional plans for a further $400 billion in capital expenditure in the following four years.
In contrast, Apple is taking a different approach and using external cloud providers for its AI training capacity, thus being more reliant on external partnerships with the benefit of allocating less of its own capital for data centres.
It is evident that investments in AI are not only being regarded as a technological investment but also a strategic tool from a geopolitical perspective, with Trump claiming that he wants to make the US “the world capital of artificial intelligence”. This supportive stance from the US president remains key for US companies to extend their dominance in the AI space.
The AI theme will remain a dominant factor in the coming reporting periods across the international equity markets and investors ought to be attentive for the opportunities that this new technology is providing, while monitoring the returns on invested capital that are being generated from capital investments in AI infrastructure.
Jonathan Falzon is a research analyst at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
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