Microsoft Is Losing a Staggering Amount of Money on AI

AI remains an astronomical money pit.

Money Pit

Microsoft has spent a staggering amount of money on AI — and serious profits likely remain many years out, if they're ever realized.

The tech giant revealed that during the quarter ending in June, it spent an astonishing $19 billion in cash capital expenditures and equipment, the Wall Street Journal reports — the equivalent of what it used to spend in a whole year a mere five years ago.

Unsurprisingly, most of those $19 billion were related to AI, and roughly half was used for building out and leasing data centers.

Major tech companies are investing heavily to capitalize on the current hype surrounding generative AI. And the costs are racking up, with specialized chips and huge amounts of electricity straining budgets across the tech world.

Microsoft still has enough money in the bank, despite having spent a record amount last quarter, totaling $36.8 billion in cloud revenue alone and a record $109 billion total in operating income.

Nonetheless, whether the $19 billion — and far more that will surely chase it — will ever be recouped remains to be seen. Despite the astronomical costs, Microsoft and its peers have yet to see any significant amounts of revenue from AI worthy of disclosure in financial earnings, meaning they're currently losing a staggering amount of money on the tech.

Burning Cash

While tech giants have been adamant that AI is a long game, analysts are becoming increasingly wary of the losses.

Last week, The Information reported that OpenAI could end up losing $5 billion this year alone, and could run out of cash in the next 12 months without any major cash injections.

"Despite its expensive price tag, the technology is nowhere near where it needs to be in order to be useful," Goldman Sachs' most senior stock analyst Jim Covello argued in a report last month.

Google has similarly had to reassure investors, with CEO Sundar Pichai saying that the company was "at the early stage of what I view as a very transformative area" during the company's earnings call last week.

Much like Microsoft, Google has rapidly ramped up spending on AI infrastructure in the first half of this year, and is expected to spend $49 billion in capital expenditures by the end of the year.

For his part, Microsoft CEO Satya Nadella asserted during this week's earnings call that the company was justified in spending the eye-searing $19 billion, arguing that the company had the "demand signal."

The company's CFO Amy Hood added during the call that Microsoft was investing in assets that "will be monetized over 15 years and beyond," a leap of faith that has many analysts worried.

"The street doesn't have a lot of patience," Synovus Trust senior portfolio manager Daniel Morgan told Reuters. "They see you spending billions of dollars and they want to see a pickup in revenue of that amount."

"If these companies do not hit it out of the ballpark and are far better than the estimates then they are going to be knocked back," he added.

More on AI spending: Investors Are Suddenly Getting Very Concerned That AI Isn't Making Any Serious Money