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.
AI Investment Squeezes Buyback Programs
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 US$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.”
Shift from Capital-Light to Capital-Intensive
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 US$85 billion in its first equity sale in 20 years to help fund capital expenditures on data centres. 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 US$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.
Impact on Shareholders
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 US$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.”
Alphabet Leads the Change
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 US$280 billion into share repurchases, or more than six per cent 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 US$15 billion on repurchases in the same period a year ago.
