Google Exceeds $205 Billion in Spending, Wall Street Concerned

Google surpasses $205 billion in spending, Wall Street concerned

Investors received a disappointing surprise from Google: an increase in its spending estimate, reaching up to $205 billion, compared to a previous projection of $190 billion for the last quarter. Even the lower end of Google's newly projected range ($195 billion) significantly exceeds what the company had previously forecasted as its spending ceiling.

It is important to note that there is a tendency to downplay this figure by saying things like, "What does $15 billion mean among friends?" However, from an investor's perspective, Google has essentially admitted that it cannot accurately forecast its costs, which is concerning. Furthermore, Google is spending more money than it earns and is facing competitive pressures from Chinese AI tools, as well as pricing pressure to keep the cost of its models low.

You don't need to be a financial genius to understand that spending more than you earn is not an ideal business practice. Additionally, an increase in spending in an environment where prices need to either remain stable or decrease is not a good sign. Spending more and getting the same amount in return, or, worse, spending more for less revenue, is not a viable strategy.

Funding pressure in the AI ecosystem

These pressures are not limited to Google. They weigh on the entire AI ecosystem. Meta, Amazon, and Microsoft will also release their earnings this week, and many believe they will announce higher-than-expected spending for the development of their data centers.

Other indicators suggest that investors are beginning to worry. First, it seems that people have finally noticed that SpaceX is facing difficulties; currently, its shares are worth almost half of their peak value. Next, investors are concerned about the debt associated with Oracle's data center development, which is worth noting, as Oracle represents a public market equivalent to OpenAI. Finally, Nvidia has engaged in discussions for agreements totaling $750 billion. Nvidia, even more than OpenAI, is at the center of circular funding in the AI ecosystem. If it injects more money to support AI development, it could indicate that actual demand is weaker than expected.

More specifically, Nvidia's guarantee on OpenAI's debt, an agreement worth $250 billion, is "as much a reminder of the funding pressure in AI development as it is a signal of demand," said Billy Leung, an investment strategist in the tech sector at Global X Management.

Growing concerns amid competition

In addition to this, a Chinese startup has launched a new model, which always raises concerns. One reason for this nervousness is that China's biggest constraint is that it, at least theoretically, does not have the same access to GPUs as American companies, yet their AI systems remain competitive. If this holds true, it could mean the end of the financial windfall for Nvidia (and other chip manufacturers). Moreover, it could indicate that companies are building too many data centers.

Discussions with many smart people reveal that they are more optimistic about the AI boom. (For three years, they have been asking how AI companies actually plan to make money, and they still haven't received a satisfactory answer.) They all believe that data centers are likely to be overbuilt during this period of exuberance. They also think that many AI companies will disappear when the inevitable correction occurs. They are investing in the sector anyway, as they believe that the companies that survive will yield more money than they will lose on those that vanish.

AI proponents are therefore watching the market peak like everyone else; they know it is inevitable. It is difficult to determine in advance what this market peak will be, of course. But some investors are clearly starting to have doubts about the entire AI sector, and they are shifting their money elsewhere.

It is possible that the results from the other major tech companies will reassure investors, and that this period of AI-related anxiety will pass. On the other hand, if one is looking for peak signals, Elon Musk is a good indicator, and SpaceX has just gone public. Good luck to everyone, one might say.