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Dear reader,

Here’s a puzzle. Electric car company Tesla presents a terrible set of first-quarter earnings and is rewarded with a 10 per cent share price jump. Social network giant Meta doubles net income and watches as its share price slides more than 12 per cent. Microsoft reports faster revenue growth than Alphabet but sees gains in after-hours trading dwarfed.

The explanation is spending on artificial intelligence. Meta, Tesla, Alphabet and Microsoft are in the middle of grand (read, expensive) plans to go beyond their existing business models by investing heavily in AI. Meta is on course to raise capex by up to 42 per cent this year, while Alphabet is forecasting a 49 per cent increase. In the last quarter, capex at Microsoft increased 79 per cent compared with last year. At Tesla, it rose 34 per cent. These increases exceed revenue gains (or, in Tesla’s case, losses). 

For now, expansive talk of gigantic future AI-led revenue streams is just that. Without a firm grasp on outcomes, shareholders want proof that some returns are being generated and that spending is not going off the rails. Alphabet’s decision to issue its first dividend — seen as a mark of maturity — drove its big price gain. Meta’s aggressive plans for AI spend triggered its price fall.

In reality, Microsoft is the company showing the most tangible proof of AI revenue generation from hefty investments. It has already rolled out a large range of services, including meeting transcription and spreadsheet analysis, available for $30 per person, per month. It recently announced a five-year, $1.1bn deal with Coca-Cola to use cloud and AI services. In its earnings call this week it said that demand for AI tools slightly exceeded capacity. As Lex said last year, moving early on generative AI has paid off.

Microsoft already pays out a dividend. But the novelty of Alphabet’s new 20 cents-per-share dividend plus $70bn buyback programme eclipsed this. Alphabet has been criticised for its apparent inability to communicate AI breakthroughs and explain whether AI will undermine its core search business. The dividend is intended to placate shareholders concerned by this and the scale of AI spend. (Don’t forget, however, that the Department of Justice has looked down on big buyback programmes in the past.)

Column chart of capital expenditure ($bn) showing Meta's spending plans take flight

As for Tesla and Meta . . . exactly how AI fits into their respective electric car and social networking businesses is up for debate.

See if you can spot the air of defensiveness on earnings calls. Here’s Elon Musk challenging Tesla shareholders to get on board with his AI vision or get lost: “We should be thought of as an AI or robotics company . . . if somebody doesn’t believe Tesla is going to solve autonomy, I think they should not be an investor in the company.”

And here’s Mark Zuckerberg trying to recast Meta’s business model: “I actually think we’re in a place where we’ve shown that we can build leading models and be the leading AI company in the world.” 

What differentiates the two is the level of detail investors have been given about spending. Tesla may be hyping up a self-driving robotaxi, but it is aware it must address problems with demand and keep a lid on costs. Musk says Tesla can produce cheaper vehicles next year using existing factories. 

Meta, on the other hand, has markets spooked. Analysts at Mizuho say the revelation that the company appears to be in the early stages of a new investment cycle has come as an unwelcome surprise. The company has a record of monetising new products faster than expected. But with AI, it could be locking itself into high operating expenses that it will struggle to escape from.

Quick links 

Things I’ve enjoyed this week 

My favourite chart was Tesla’s SoftBank-worthy description of its own ecosystem. Look at page 13 of the latest shareholder deck and marvel at the way in which “vehicles” have been relegated to just one, off-centre square. 

A newsletter from Casey Lewis, a former editor at Teen Vogue, has reignited interest in this Dazed article on Frutiger Aero — a shiny, techno-optimist aesthetic from the early 2000s. Think old Windows screensavers showing ultra-green grass and bright blue sky. It is described as a reaction to the AI-doomerism of current-day tech discourse. 

Finally, a lengthy article to save for your commute home. British economist Wynne Godley is regarded as one of the few forecasters whose models foresaw the financial crisis. Despite his considerable success, he maintained a constant fear of letting people down, something he traced back to an unhappy childhood. This article in the London Review of Book from 2001 is a memorable description of that childhood, along with his disastrous attempts to address it in psychoanalysis. 

Enjoy your weekend, 

Elaine Moore
Deputy head of Lex 

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