Alphabet spells out more AI capex, China+1 doesn't add up

Hello from Yifan in Silicon Valley. I hope everyone (in the Northern Hemisphere) is enjoying the falling leaves and sweater season.

Wall Street got a proper scare from Alphabet's earnings before Halloween. On Wednesday, Google's parent company reported solid third-quarter revenue growth, with record sales for the cloud business unit. But its shares plunged more than 10% at one point during extended trading, despite all signs indicating that more people and companies are now using Google's AI services and even its in-house AI chips.

After several years of tech companies pouring billions and billions of dollars into AI, revenue growth alone is no longer enough to impress the market. Google's spending of $51.4 billion in capex for AI infrastructure buildout in three months and ending the quarter with negative free cash flow of $9 billion turned out to be a warning sign for many, rather than a boost to confidence in continued AI investment.

Samsung Electronics got a similar cold shoulder from the market after its earnings report Thursday. Despite the South Korean semiconductor giant saying it became the first global technology company to top 100 trillion won in quarterly operating profit, thanks to continued demand for memory chips amid the AI buildout, its shares slumped following the earnings report.

Investors are now growing increasingly worried about the massive spending on AI by companies such as Google and are starting to demand proper returns here and now, not in five years.

As Wall Street awaits this week for other U.S. Big Tech companies to release their third-quarter earnings and future AI investment guidance, we are seeing similar reality checks on AI across global markets, including in China, where AI stocks have fallen sharply in recent weeks due to similar concerns about the profitability of AI.

Tech illuminati such as Elon Musk have long criticized the public market for being shortsighted and overlooking the long-term benefits of investing in technology that's expensive to build.

But it has been almost four years since the ChatGPT-led AI boom began, so how patient should the market be?

As if it were not jittery enough, the U.S. midterm elections next week are casting another shadow over AI trades. More U.S. voters are turning against AI and data centers than ever before.

Around 40 local ballot measures nationwide on data center development will go to a vote on Nov. 3. The implications will reach far beyond the U.S., as the entire Asian tech supply chain, from Taiwanese server makers to South Korean chipmakers, eagerly awaits the results.

Leading PC makers, including HP of the U.S. and Asus and Acer of Taiwan, are combating soaring component costs by shifting some production from Thailand and Vietnam back to China and using a new generation of contract manufacturers, Nikkei Asia's Lauly Li and Cheng Ting-Fang report.

Multiple sources told Nikkei Asia that the PC makers are seeking greater manufacturing efficiency as their bill of materials rises, with demand from AI causing acute memory and storage shortages.