The major technology companies are eating themselves alive
Nvidia, the much-beloved creator of the next generation of A.I. chips whose stock was crushed on Monday, gets almost half of its revenue from its siblings in the Magnificent 7 [Microsoft, Apple, Amazon, Nvidia, Tesla, Meta and Alphabet]. In 2022, Google paid Apple $20 billion for the privilege of being the default search engine on Safari, according to unsealed court documents, and therefore very likely accounts for around 20 percent of Apple’s profit. Meta employs Amazon Web Services for cloud services and increasingly in its A.I. push, and all of the tech giants have unleashed an inordinate amount of spending on infrastructure.
And when the tech giants aren’t showering money on one another, they often practice another form of self-cannibalism: purchasing their own shares. In the past three fiscal years, Apple, Alphabet, Meta, Microsoft and Nvidia have bought back a total of over $600 billion of their own stock — a notoriously low-return activity.
There is nothing particularly troubling about the Magnificent 7 purchasing products and services from one another. Nor is there anything necessarily wrong with spending large amounts on capital expenditures or stock buybacks. But if all of these operational and capital allocation decisions are guided by extremely low investor expectations, they may well eventually yield correspondingly low returns. And that gives us a possible glimpse into what lies ahead for the Magnificent 7 and A.I. Rather than a boom that expands still further to a speculative bubble or a rally for the remaining Unmagnificent 493, we may just witness a slow grind of low returns on excessive spending on a technological future that will not be nearly as revolutionary or imminent as promised.
More dangerously, these companies — like all companies — will one day disappoint those who view them as safe assets. And the self-cannibalization will reveal itself to be not just a mediocre investment but also a shaky bet on an illusion propagated by a mythical and messianic belief in technology and these companies. [Continue reading…]