Investors Penalize Tech Firms for AI Spending Decisions

Meta's shares dropped 7% after its AI expenditure exceeded operating cash flow, while MetLife's Drew Matus noted that reducing spending also draws investor disapproval.

Meta outperformed revenue forecasts, posting a 26% increase in sales. However, its Q3 capex of $34.9 billion surpassed operating cash flow, leading to a share decline on October 22.

What Do Investors Actually Want From AI Spending?

Following Meta's decline, four other major technology companies now confront a similar challenge. Microsoft and Alphabet are due to release earnings on Wednesday, with Amazon and Intel following on Thursday.

According to Bloomberg hosts, these four firms represent around 15% of the Nasdaq 100 index, which has decreased by approximately 7% this month.

Matus stated that companies reducing capital expenditure face penalties, and those increasing it receive identical treatment.

“I don’t actually really know what people want from these people.”

That was the assessment of Drew Matus, chief market strategist at MetLife Investment Management, speaking on Bloomberg.

According to Matus, investors seek evidence that AI can sustain long-term expansion, but discussions about employment and earnings are set to continue.

Additionally, Meta revealed plans for a new category of nonvoting Class C shares. Scotiabank observed that the company's management suggested a potential equity offering.

In July, Alphabet experienced an approximate 4% decline in after-hours trading after raising its capex outlook. A BeInCrypto examination of filings revealed that AI spending is consuming cash at Microsoft and Amazon.

Can Big Tech Spend as Much as It Promises?

Matus expressed skepticism that announced budgets would translate into actual expenditure this year, noting that companies first need to secure labor, machinery, and property.

Nonetheless, he pointed out that sectors with the greatest AI exposure are adding employees rather than cutting them.

The Federal Reserve is scheduled to meet on October 27 and 28 during a busy week for the central bank. Its policy decision will be announced Wednesday afternoon, just ahead of earnings releases from Microsoft and Alphabet.

In September, the Fed increased interest rates to a range of 3.75% to 4%. After Chair Kevin Warsh stated that elevated inflation had not altered his perspective, traders reduced their expectations for an October rate increase.

Matus anticipates that Warsh will refrain from making a move and will reassess policy in December.

According to Matus, AI simultaneously propels capital expenditure, stock price gains, and consumer spending. He described this economic concentration as more concerning than the stock market's concentration.

Consequently, a disappointing forecast from one firm could put the entire chain under strain.