(Bloomberg) — The artificial-intelligence race is becoming so expensive that it’s snuffing out one of the key forces that has helped keep Big Tech stocks soaring for years: steady share buybacks.
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Of the four biggest AI spenders — Alphabet Inc., Microsoft Corp., Meta Platforms Inc. and Amazon.com Inc. — only Microsoft bought back shares in the first quarter. And its $3.4 billion in repurchases was the lowest total among the group in nearly a decade, according to data compiled by Bloomberg.
“The amount of capex that’s being spent is dramatically higher than even the high end of what anyone would have thought not just a year ago but three months ago,” said Robert Schiffman, a senior credit analyst at Bloomberg Intelligence. “Buybacks are likely to continue to fall as capital is prioritized for capex.”
Not only have share repurchases slowed to a trickle, but some companies are issuing more stock to finance their AI ambitions. Alphabet Inc. is planning to raise about $85 billion in its first equity sale in 20 years to help fund capital expenditures on data centers. And Facebook owner Meta Platforms Inc. is reportedly weighing an offering that could raise tens of billions of dollars.
The disappearance of buybacks and the issuance of new equity represent the latest shift in the way technology giants operate as a result of heavy spending to add AI computing capacity. For years, part of the companies’ appeal was their capital-light businesses, but suddenly they’re capital intensive. With the four big AI spenders forecasting as much as $725 billion in capital expenditures this year, and even more expected in 2027, the outlays are sucking up a larger proportion of free cash flow and prompting them to take on more debt.
Buybacks are a tax-free way to return cash to shareholders. By plowing a chunk of their earnings into repurchases, the companies reduce the number of shares outstanding, which has the effect of boosting earnings per share and ultimately the stock price. Naturally, they’re quite popular with investors.
Without that lever, however, the tech giants face more pressure to deliver commensurate returns on invested capital, according to Brent Fredberg, portfolio manager and tech sector analyst at Brandes Investment Partners, which has $43 billion in assets.
“The risk profile has changed,” he said. “Over the past decade they were capital light and had huge network effects. But increasingly free cash flow is declining, balance sheets are less attractive but still strong, and now they’re going from buying back shares to issuing shares and they’re starting to bump into each other competitively.”
Of the four big spenders, Alphabet has been by far the largest buyer of its own stock. Over the past five years, the Google parent has plowed about $280 billion into share repurchases, or more than 6% of Alphabet’s current market capitalization, according to data compiled by Bloomberg. The first quarter marked the first time Alphabet didn’t buy back shares in nearly 10 years after spending more than $15 billion on repurchases in the same period a year ago.
Of course, not all tech giants have altered their approach to capital returns. Apple Inc. has continued its buybacks while avoiding big capital spending in favor of partnering with companies like Google to help power AI features. In April, the iPhone maker authorized $100 billion for share repurchases, the same as the previous year. Apple also raised its quarterly dividend by 4% to 26 cents a share.
Nvidia Corp., which is one of the major beneficiaries of all this AI spending, also is actively buying back its stock. Last month, the chip giant earmarked $80 billion for repurchases, following a $60 billion authorization in August. Nvidia spent roughly $20 billion on buybacks in its fiscal first quarter, which ended in January, up from about $14 billion a year ago.
For now, investors are giving the biggest capex spenders the green light to dedicate their cash to building out AI rather than buying back more shares. For example, Alphabet shares are up slightly in the roughly two weeks since the company first announced its equity offering, while the S&P 500 Index has lost 2.5% and the tech-heavy Nasdaq 100 Index is down 3.2% in that stretch.
How long that patience lasts, however, is another question.
“These companies have enough access through public and private markets that there’s more than enough capital to fund these guys even if capex numbers grow dramatically,” said Schiffman. “The caveat that would provide real problems is a macro issue or capital markets close. That would be the real challenge.”
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–With assistance from Subrat Patnaik.
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