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One of the more irritating things about artificial intelligence bots such as ChatGPT is how reluctant they are to say “I don’t know”. A similar inability to speak plainly plagues the wider technology world. Recently, it cost Google parent Alphabet $200bn.
Google’s Planned Capital Expenditure
That was roughly the sum wiped from the search-engine giant’s market capitalisation on Tuesday after it announced planned capital expenditure of $75bn this year.
A 50% Increase
The amount is 50 per cent more than what the company spent last year, an increase explained by the need to develop ever-better AI. As always, there was little detail on where the spending will go or how much profit it will generate.
Analysts’ Forecasts
Alphabet has only itself to blame if that number was a surprise. Analysts had forecast just $60bn of spending for this year, according to Visible Alpha. Unlike some of its rivals, Alphabet does not give “guidance” to keep investors’ expectations within a reasonable range. But that secrecy is a choice, not a necessity.
A Trend in the Tech Industry
As tech companies raise bets on AI and cloud computing — Microsoft plans to spend $80bn in its fiscal year ending in June and Facebook owner Meta has allocated up to $65bn in 2025 — the absence of detail on what they are buying begins to stretch credulity.
Avoiding Future Market Upsets
Alphabet’s finance chief Anat Ashkenazi said Google’s purchases would mostly be servers and data centres. But there was nothing on what kind, from which suppliers or where they would be located. If Alphabet wants to avoid future market upsets, it could always give investors some numbers to conjure with. It could sketch out its hoped-for returns on capital expenditure or target a certain amount of revenue for each dollar invested. Even a distant goal is better than none.
A Comparison with Other Industries
Other industries worked this out long ago. While tech may not like to compare itself to more earthy sectors, mining companies have learnt the hard way that investors do not tolerate overinvestment forever. Rio Tinto and BHP, for instance, tout “return on capital employed” as a sign of discipline. Investors watch closely, as they should — large mining projects on average run 79 per cent over initial budgets, according to McKinsey estimates.
Conclusion
If Alphabet wants to avoid future market upsets, it should consider giving investors more information on its spending plans. It’s not just about being transparent; it’s about being responsible with investors’ money.
FAQs
Q: Why did Google’s market capitalization decrease by $200bn?
A: The decrease was due to the company’s announcement of planned capital expenditure of $75bn this year, which was 50% more than what was spent last year.
Q: Why did analysts forecast a lower capital expenditure for Alphabet?
A: Analysts had forecast just $60bn of spending for this year, according to Visible Alpha.
Q: Why does Alphabet not provide guidance on its spending plans?
A: Alphabet chooses not to provide guidance on its spending plans, which can lead to uncertainty among investors.
Q: What do other industries do differently?
A: Other industries, such as mining, provide more information on their spending plans and returns on capital employed to keep investors informed and confident in their investments.
