DeepSeek and the AI Cash Burn Battle – The Winner's Curse!
As the pace of AI capital expenditure accelerates, tech giants find themselves in a dilemma: the cost of losing this race could be significant, but the consequences of winning it might be worse—the winners of massive investments may face the prospect of funding exhaustion
Are AI leaders stepping into the "winner's curse"?
On February 6, Jim Reid, the head of global macro research at Deutsche Bank, and his team released a report exploring the "burning money" situation in the AI industry. Deutsche Bank stated that recently, as the pace of AI capital expenditures has accelerated, tech giants are finding themselves in a dilemma:
The cost of losing this race could be significant, but the consequences of winning it may be worse— the winners of massive investments may face the prospect of funding exhaustion.
In recent weeks, the investment commitments announced by the four major tech companies indicate that AI capital expenditures this year could grow by about 50%, reaching approximately $300 billion. Microsoft plans to invest about $80 billion, Meta plans to spend $65 billion, Amazon's spending will exceed $75 billion, and Google also plans to spend about $75 billion, far exceeding market expectations.
Naturally, the market is beginning to worry whether the leading AI companies are experiencing a "winner's curse" similar to that of the telecom industry in 2000, the financial crisis in 2008, or the railroad industry in the late 19th century.
For example, the life-and-death bidding for 3G spectrum licenses in the UK in 2000. At that time, after 150 rounds of bidding, five companies paid a total of £22.5 billion, while the government's initial revenue expectation was only £1 to £3 billion. It is not hard to imagine that these highly indebted winners were dragged down, as their high bidding expenditures left them unable to build network infrastructure. In contrast, Japan almost gave away 3G licenses for free and ultimately surpassed the UK technologically.
Perhaps, as Chuck Prince, CEO of Citigroup, famously said when the subprime mortgage crisis began to emerge in 2007:
"When the music is playing, you have to get up and dance, but when the liquidity dries up, things get complicated."
Can stock prices keep up with capital expenditures?
Deutsche Bank stated, so far, the stock prices of tech giants have risen in sync with the increase in expenditures. However, investors are worried about DeepSeek's impressive performance and the tech giants' more significant AI capital expenditure guidance this year, and market anxiety is intensifying.
Specifically, Alphabet's stock price fell by 7.5% after the earnings report was released, as investors digested its high AI capital expenditure plans. Microsoft's stock price also dropped by 6.2% after its earnings report was released.
Meta is an exception, with its stock price rising by 1.9%, as the company demonstrated that AI directly drove a one-fifth increase in advertising revenue and claimed that Meta AI has now become the world's number one AI assistant.
