Did the artificial intelligence bubble just burst?
In US trading, Nvidia reached a market capitalization of $5 trillion overnight, after which Microsoft, Meta Platforms and Google’s parent company Alphabet announced their September quarter results.
The results were, as expected, impressive. Microsoft reported first-quarter revenue of $77.67 billion, beating estimates of $75.33 billion, with earnings per share (EPS) of $4.13, beating the forecast of $3.67.
Alphabet delivered third-quarter revenue of $102.35 billion, ahead of the $99.89 billion estimate, while earnings per share of $3.10 topped the $2.33 forecast. Cloud revenue grew by 34 percent.
Metaplatforms posted third-quarter revenue of $51.24 billion, beating estimates of $49.4 billion, but earnings per share of $1.05 missed the $6.66 forecast due to taxes.
But while Alphabet shares rose 7.5 percent after hours. Microsoft shares fell 3 percent due to disappointing growth of the Azure cloud.
Perhaps more importantly, Meta’s shares are down eight percent after hours – at one point they were down more than 9.1 percent – on concerns about heavy spending on artificial intelligence (AI).
Figure 1. Meta shares drop 9.14 percent after hours.
Meta Platforms announced a significant increase in capital expenditures, projecting $70 to $72 billion by 2025, with plans for an even steeper increase in 2026 to secure the computing power needed to weave AI deeply into its ecosystem.
Meta CEO Mark Zuckerberg is said to have struck a defiant tone, emphasizing the transformative potential of AI and the urgency to lead the spending race. “We are seizing this moment to accelerate,” he told investors. “Mastering these technologies will unlock extraordinary value. The company that excels in every facet of AI will realize the lion’s share of its potential.”
Zuckerberg’s vision is clear: Meta wants to pioneer breakthrough AI-driven features, integrate them across its platforms and scale to billions of users. He argued that this will not only create new products and revenue streams, but also boost existing businesses.
Here’s the problem. The market could catch up with our thesis that there may not be enough customers spending enough money for the AI mega-investment to generate a decent return.
Earlier today my article “What Does the Artificial Intelligence Boom Have to Do with Iron Ore?” I wrote here,
“Huge sums are being funneled into data centers to power artificial intelligence. Morgan Stanley analysts predict that total spending on these facilities could reach as much as $3 trillion by 2028 – not even taking into account skyrocketing energy costs. McKinsey goes one step further, projecting $5.2 trillion by 2030.
“According to McKinsey, about 60 percent of this AI-related data center spending will go to semiconductor chips and other hardware. These assets typically wear out and are depreciated over about 5.5 years. Assuming they stop producing real economic value after that — and taking into account that much of Morgan Stanley’s $3 trillion estimate is deferred to later years — the hardware and semiconductor investments alone would require more than $500 billion in capital expenditures. net cash flow alone in 2028 to cover the basic cost of capital on the equipment investment.
“For the math to work for data center operators aiming for a healthy 20 percent free cash flow margin (which would validate their high stock prices), they would need to bring in about $2.5 trillion in revenue annually.
“Okay, now assume that the data center customers – the businesses and consumers who buy these AI services – also want to generate a 20 percent margin. They would have to spend about $3.1 trillion on AI services like agents and Large Language Models (LLMs).
And here’s the problem; St James notes that $3.1 trillion currently equates to about 10 percent of the entire U.S. gross domestic product (GDP). To put that figure into context, total U.S. military spending is about 3.46 percent of GDP. According to the U.S. Treasury Department, total federal government spending in FY 2025 was $7.3 trillion, which amounts to 23 percent of GDP.
St James has provided some other comparisons to understand the optimistic expectations arising from the required aggregate estimates for AI spending and monetization. Netflix, with its army of about 300 million subscribers, is on track for revenue of about $39 billion this year. Microsoft’s Office 365 suite, a staple for businesses around the world, brings in about $95 billion. Even OpenAI, with the largest AI chatbot user base, generates about $13 billion annually. It AI’s transformative potential is undeniable, and its growth story is just beginning. Yet the sheer volume of revenue and spending on AI tools – $3.1 trillion – needed to recoup current capital expenditures underlines the need for AI to quickly generate revenue to justify the hype.”
Mark Zuckerberg’s comments are not the first time he has reiterated the ambition to grow at all costs, but the aftermarket reaction – a 9 percent share price drop – could indicate that investors are getting nervous and may conclude that we are already like this – that there is a risk of spending too much on AI.
Zuck’s bold prediction for AI spending has led to a sharp sell-off, with shares plunging after hours. Could the market be growing tired of the ‘build now, profit later’ gamble? Of course, time will tell.
Disclaimer:
The Poland Capital Global Growth Fund owns shares in Nvidia, Alphabet and Microsoft. This article was prepared on October 30 with the information we have today, and our opinions may change. It does not constitute formal advice or professional investment advice. If you wish to trade in these companies you should seek financial advice.
Roger Montgomery is the founder and chairman of Montgomery Investment Management. Roger has more than three decades of experience in fund management and related activities, including equity analysis, equity and derivatives strategy, trading and securities brokerage. Before founding Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also the author of the best-selling investing guide to the stock market, Value.able – how to value and buy the best stocks for less than they are worth.
Roger regularly appears on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
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