Does the AI Emperor Actually Have Any New Clothes?
By Shira Ovide
Over the past decade, the giants of Silicon Valley became reliable engines of the American economy and the nation’s retirement accounts.
Must-have digital products like Google and Facebook hooked people and businesses, spewing geysers of cash that made tech giants the new blue chip stocks and fattened investment portfolios as markets soared.
The finances of America’s technology stalwarts now look very different. To develop and deliver what the companies say is revolutionary artificial intelligence, they’re feeding every available dollar into the cash-incinerating maw of AI machines. Tech superstars that once had oodles of cash left over at the end of each year are now flipping into the red, with enormous stakes for every American and the wider economy.
To optimists in Silicon Valley, the White House and beyond, the big AI bet promises an even bigger payoff: huge corporate profits and a society-wide boost to wealth and well-being when AI delivers the promised transformation of life, work and the economy.
But questions about that AI vision are now growing more urgent: When, if ever, will this payoff arrive? And what will the fallout be for Americans if the titanic investment doesn’t quickly deliver?
“This AI thing better work out because if it doesn’t ... we’re going to have a problem,” said Torsten Slok, chief economist at investment firm Apollo Global Management.
AI costs and doubts are spreading. The U.S. stock market has swooned this summer over fear of the AI bubble going bust. The AI boom is pushing up inflation, adding to President Donald Trump’s challenges in tackling Americans’ affordability concerns. And there are signs that AI may be widening the economic divide between the country’s haves and have-nots by directing more wealth toward places and people that are already economically ahead.
The AI gamble sweeping up American fortunes is led by tech companies splurging on hulking data centers packed with computer chips and equipment needed to develop sophisticated AI models and deliver them to customers.
In investor calls in the past week, Google, Microsoft, Meta and Amazon pointed to soaring AI-related sales and business deals. Advertisers are using the technology to tailor marketing pitches and corporations and start-ups are buying access to chatbots and other AI software to boost productivity. The wider U.S. economy, including construction workers and electricians, are getting a lift from the build-out of AI computer hubs.
But this spending can only continue if AI generates an even larger avalanche of new revenue to pay for it all. Financial results released over the past week show that the AI titans’ mammoth costs are largely swamping the sales boost from the technology.
At Google, for every dollar of cash its business generated in the past three months, $1.15 went out the door to pay for AI computer chips and equipment, land for AI data centers and other big-ticket purchases. The company is covering the difference partly by borrowing money and selling more of its stock.
Next year, five leading AI companies — Google, Amazon, Microsoft, Meta and Oracle — are projected to have negative free cash flow, which measures the cash left over after paying expenses and AI infrastructure costs. The figures, based on investment analyst projections compiled by S&P Global Market Intelligence, show a stunning reversal for what have been some of the world’s most cash-generating corporations.
On Thursday, Amazon CEO Andy Jassy gave an impassioned defense of the company’s huge spending to capitalize on what he said was sustained zeal from businesses to buy AI. “We have clear line of sight to strong financial returns,” he told investors. (Amazon Executive Chairman Jeff Bezos owns The Washington Post.)
The companies remain profitable by standard financial accounting measures that spread out the costs of their AI infrastructure spending over many years.
Silicon Valley’s AI spending spree has become a high-stakes Rorschach test. AI boosters see the mammoth costs of building out computing facilities for AI as a rational, once-in-a-lifetime opportunity to cash in on insatiable demand for history’s most transformative technology. Pessimists see a bet so gargantuan that it cannot possibly pay off.
The pessimists are growing louder. The Bank for International Settlements, a typically measured institution in Switzerland that advises government bankers around the world, recently warned there was risk of “economy-wide recessions” if the AI boom falters. That could mean pain for workers and communities across the United States.
“I’m not saying AI is going to go away, it’s just not clear to me these guys are going to make money on it,” said Christopher Wood, global head of equity strategy at investment bank Jefferies who has correctly predicted past financial bubbles.
As recently as June 2, exuberance about AI helped lift the S&P 500 stock index to an all-time high. But fear is now winning in what’s become an AI freak-out summer. People who own stock in the biggest losers of recent months, including Elon Musk’s Tesla and SpaceX, business software firm Oracle and computer chip titans Nvidia and SK Hynix, have collectively lost trillions of dollars.
Matt Orton, chief market strategist of investment firm Raymond James Investment Management, says the panic is out of control because AI has huge potential. “A lot of investors have lost their minds,” he said.
At the same time AI is eviscerating Americans’ stock wealth, it’s further straining their cost of living.
Many executives are lamenting that the companies developing AI are buying so many computer chips for AI calculations that it’s gobbling all the available supplies and driving up their costs. As a result, companies including Apple and Microsoft have raised prices for smartphones, laptops, video game consoles and other consumer and business products.
In some parts of the country, energy demand from data centers is pushing up household electric bills. Some economists and government officials have pointed to those AI-related price increases as one culprit for persistently stubborn inflation.
NCTA, a trade association representing large internet service providers and cable TV companies, is among the American business groups pleading with the Trump administration to do something about AI-related computer chip price increases.
Without action, executives say that AI will hold back new products and features or spark even higher prices for home internet equipment, cars and medical devices. “Consumers are really going to suffer both from costs and from lack of innovation,” said Cory Gardner, CEO of NCTA.
White House spokesman Kush Desai said that the Trump administration is supporting U.S. computer chip manufacturing to “ensure Americans have access to a ready supply of critical inputs for everyday electronics.”
Evidence is also emerging that undermines the idea that AI can become a great equalizer that empowers people and businesses of all backgrounds to better their financial circumstances.
Research by Barbara Denham, lead economist at research and consulting firm Oxford Economics, found that large U.S. metropolitan areas that are already economic winners are benefitting the most from the AI boom.
Denham said that’s because many of the tech companies developing AI, and the white-collar industries that have been the most avid users of AI, are concentrated in wealthy regions including the Bay Area, New York, Seattle and D.C.
The economic gains of the AI boom are “self-reinforcing,” she said.
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