AI companies need to ‘start generating some serious income’

Big Tech earnings have come and gone. Well, save for Nvidia (NVDA), which reports on Nov. 19. That aside, one key trend emerging from this quarter’s reports is that Wall Street largely likes what it’s seeing when it comes to AI, despite increased spending among hyperscalers.

Microsoft (MSFT), Google (GOOG, GOOGL), and Amazon (AMZN) each reported solid results last week on strong performances from their respective cloud businesses.

The only problem? Companies that use their cloud services, like OpenAI (OPAI.PVT), still aren’t making money.

“The big question that is still hanging over everybody’s head is … how does a company like OpenAI that says they’re going to spend $1.4 trillion, it’s losing billions of dollars a quarter, possibly going to pay for that,” TECHnalysis Research president and chief analyst Bob O’Donnell told Yahoo Finance.

“They’ve got to start generating some serious income. And that’s the part that has people kind of nervous.”

Amazon saw its AWS segment growth reaccelerate to 20.2%, a level CEO Andy Jassey said the company hasn’t seen since 2022.

Microsoft’s cloud revenue, which includes its Microsoft 365 Commercial cloud, Azure, Dynamics 365, and the commercial portion of LinkedIn, jumped 26% to $49.1 billion. Google’s cloud revenue rose 34% year over year to $15.1 billion.

Each company also said it is adding data center capacity as fast as it can to keep up with demand for AI tools, which will necessitate billions more in capital expenditures this year and into the next.

Amazon and Google parent Alphabet stock rose on the reports, while Microsoft stock fell. Still, analysts were positive on the results, pointing to an increase in deal backlogs and momentum for the companies’ AI businesses.

“Obviously, the overall numbers, particularly from the cloud guys who are offering AI infrastructure, were incredibly good, and they showed there continues to be robust growth,” O’Donnell said.

But the question remains: When will the AI developers start seeing the same kind of return on investment?

While AI infrastructure companies are posting massive numbers, the AI large language model companies are still burning through billions as they develop new models and revenue schemes.

And it’ll take quite some time before they begin to turn a profit. Take a look at OpenAI. It’s got commitments to spend upwards of $1 trillion to deploy the computing power it says it needs to run its AI services.

Brad Gerstner asked OpenAI CEO Sam Altman about the company’s ability to pay for its computing needs during an interview on his “Bg2” podcast, asking how a company with $13 billion in revenue can cover $1.4 trillion in spending commitments.

A visibly perturbed Altman responded, saying that the company was bringing in far more than $13 billion in revenue and that if Gerstner wanted to sell his shares, Altman would find a buyer.

Altman went on to add that revenue is growing steeply and that he believes OpenAI will be one of the most important AI clouds and that the idea that the company is about to go out of business is “ridiculous.”

“It reminds me a lot of the early days of Amazon, where it took them a long time to make money,” Zeus Kerravala, founder and principal analyst with ZK Research, told Yahoo Finance.

“I remember equity analysts back in the day … questioning whether Amazon would ever make money. And the buildup was such a long, slow roll initially. But then when the inflection point hit, it really took off,” Kerravala explained.

It doesn’t hurt that OpenAI, Anthropic (ANTH.PVT), xAI (XAAI.PVT), and other major AI firms have some deep-pocketed backers that can help keep them going well into the future.

“I think that the large language models, I think [the] Grocks, the OpenAIs, Anthropics are going to be the most exciting growth companies over the next five years,” Deepwater Asset Management managing partner Gene Munster told Yahoo Finance.

Not every AI company is going to survive, though. Like any new industry, plenty of names will fall to the wayside as AI continues to mature and more interesting businesses pop up.

“I don’t think all these companies are going to be winners. I think you’re going to have one or two of the AI companies rise above and really be the winner, like [an] Amazon, if you will, of the AI world,” Kerravala said.

And as more AI companies come online, the Amazons, Googles, and Microsofts of the world will be more than happy to provide as much computing power as they can, and pull in ever more revenue in the process.

Email Daniel Howley at dhowley@yahoofinance.com. Follow him on Twitter at @DanielHowley.

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