Mega-cap tech stocks to see steep jump in annual spending on AI equipment - BofA

Investing.com -- Mega-cap technology stocks will see a "material" increase in expenditures in 2024 as they push to build out their artificial intelligence capabilities, according to analysts at Bank of America Securities.

In a note to clients on Monday, the analysts predicted that Google-owner Alphabet (NASDAQ:GOOGL), Facebook-parent Meta Platforms (NASDAQ:META), and e-commerce giant Amazon (NASDAQ:AMZN) will see annual capital spending on servers and equipment jump by 43% compared to the prior year to $91 billion. Overall estimated expenditures will rise by 35% year on year to $145 billion, the analysts projected.

Of the three companies, the BofA analysts said they expect Meta to spend the most as a percentage of revenue, adding that the investment "should ensure [its] AI capabilities are best of breed." Investors will subsequently be keen to see if Meta can churn out any new products from its AI spending, the analysts noted.

They said markets should also be looking for employee reductions at these firms to help offset the impact of the higher expenditures, with the rate of workforce growth tipped to slow to an average yearly uptick of 3%. From 2016 to 2022, headcount grew by 26% on average.

Despite forecasting the surge in spending, the analysts retained their positive view of the AI cycle for the tech industry, saying they anticipated that average free cash flow margins for Alphabet, Meta, and Amazon will be stable in 2024 and expand in 2025.