r/valueinvesting
When does the lack of ROI on AI become a problem?
Author argues AI ROI is turning negative, citing poor enterprise returns and Big Tech earnings calls admitting monetization issues.
- Enterprise AI deployments show poor ROI, with average spend far exceeding returns and most companies seeing minimal improvements.
- Big Tech executives admit uncertainty in scaling and monetization, waiting for customers to prove ROI before shifting IT budgets.
- AI costs are compressing margins or being absorbed by companies like Salesforce, with revenue per customer potentially declining.
I own some tech stocks and I hope I’m wrong about this. I always figured the AI ROI story would turn negative at some point, I just didn’t think it would be this year. Now I do.
The ROI was always going to become a problem
The external data is pretty consistent across every source:
• SAP commissioned a study of 1,600 companies and published it themselves: average spend $26.7M, average return $4.7M, net negative
• Bain found 40% of deployments show 10% improvement or less, only 4% show more than 30%
• 44% of companies are funding their next AI project on savings that haven’t materialized yet
• PwC found 20% of companies capture 74% of returns, meaning most companies are basically getting nothing
• Amazon’s CEO said on an earnings call that the main place enterprises are winning is cutting costs, not new revenue
But the real sources are the actual earnings calls and MD&As for META, MSFT, Amazon, Salesforce, and SAP. These companies are supposed to be selling the dream, so when their own words undercut it, that means something.
Zuckerberg, on a call where he’s announcing $130B+ in capex: “I do not think we have a very precise plan for exactly how each product is going to scale month over month.”
Satya Nadella basically admitted Microsoft is waiting for its own customers to prove the ROI out before IT budgets actually shift: “IT budgets will be reshaped by a combination of business outcomes making their way into IT budgets and reallocation from other line items.” Translation: customers haven’t proven it on their own books yet.
Salesforce is absorbing the cost of the AI models it uses and said they expect to be “neutral on gross margins.” Growing fast, paying for it themselves, no margin benefit yet.
SAP is attaching AI to 66-90% of their big deals, which sounds great until you read that the attach is at order entry, not production deployment, and that management warned the shift to consumption pricing “could temporarily compress revenue per customer.”
You can only cut costs so far. Ed Zitron put it simply: if the ROI was actually there, people would be talking about it. Instead everyone talks about what AI is going to do eventually.
Why I think it’s happening this year
I go to tech meetups every now and then. A couple years ago people were showing up with real stuff, workflows that actually changed how they worked. Now it’s the same conversation recycled every time. Last one I went to everyone was talking about using AI for personal stuff, not for work. Beyond that, a few things hit at the same time recently:
• Models are just not improving at the rate they used to, and if you use them daily you can feel it
• I watched Gavin Baker this week, who actually invests in semis and AI startups. The two examples he gave of business ROI were using AI to summarize stuff and a friend who talked to Claude for an hour to help diagnose his daughter’s medical condition. Then he pivoted to AGI and UBI. That’s the bull case from someone who invests in this for a living.
• Altman went on CNBC and said the ROI criticism is fair, which is not something you say when the numbers are going well
• Uber made a public comment about burning through their entire annual AI token budget in four months
• GitHub Copilot, Salesforce, and SAP are all switching from flat subscriptions to usage-based billing, meaning every company is about to get a real number showing exactly what they spent versus what they got back. Right now that number is hidden. It won’t be for much longer.
• Anthropic is going public and a sworn affidavit from their CFO earlier this year put total lifetime revenue at $5B while they market themselves as doing $19B a year. The S-1 is going to force some honesty into the conversation.
Anyway I hope I’m wrong.
For Meta, the ROI is a problem. They don't have paid subscribers so no guarantee of income aside from ads. This one will keep going down likely toward 300/400/share area. They're spending 150B on CapEx this year and rumor has it that it's 300B next year, with 20B max on return (the AI used for ad targeting). Plus the share dilution. Not a BUY until 2028.
Msft confuses me and I think it will be re-rated because of it. They have a stronghold in healthcare that is guaranteed billions per year, and it will not get abandoned. That much PHI with their encryption methods is not to be effed with, I think once Wall Street looks at this analysis and realize they will always be profitable it will turn around.
Good points. Do you have a source for the rumors around Meta’s capex next year? I have some and don’t want to keep holding if that’s the case
Just that a lot of my friends in the Bay Area who work there continue to sell out of it and continue to accept their 'stock gifts' but they're not holding. It's concerning. Zuckerberg apparently also wants the stock at 8-10 P/E, as the FTC is going to continue to appeal their monopoly case- he's hoping if they keep it at a low cost they won't be able to split the company up...that could drag through 2030 as well.
Thanks
Meh look at their profit growth
They're not going to make 300B next year to afford their CapEx. They'll be in debt a few years.
What are you talking about? If you look at the return on capital for Meta its been very steady at around 50% over the last 3 years despite spending 134B on capex cumulatively over that period. If you look at incremental gross return on capital (this takes into account gross PP&E rather than net PP&E and EBITDA as the earnings metrics to remove any effects from changes in depreciation policy). The incremental return on gross capital employed was still very healthy 26%. If you can earn 26% return on every dollar that you deploy would you not deploy as much as you can at that return. And you are seeing this, Meta continues to accelerate their revenue growth to 33% in Q1 and will likely do close to 30% in 2026. Looking at that 30% growth will be around 60B of added revenue, assuming the average EBITDA margin of 50% gets you 30B on 135B of capex spending which is a 22% ROI. However we know that incremental revenues for advertising comes in at a very high incremental margin (some say as high as 80%). Taking the mid point of around 65% that is just under 40B of incremental EBITDA and a ROI on 135B of 29%. Advertising is the clearest ROI use case and if you speak to people at Meta it is what is driving the growth of their advertising business because the overall ad market isn't growing 30% that's for sure. Overall ad market globally is growing around 6% and Meta is already such a big player and so we can say without AI they would be growing much closer to the overall global ad market growth. Therefore of the 60B estimated incremental revenue maybe between 45-50B is coming from AI deployment with very high margins.
I agree the business is stellar, but you also need to consider
1)Sentiment- Wall Street hates the stock and will continue to selloff until CapEx goes lower and it won't be lowered. With earnings coming up in July you are looking at another 20% drop.
2) Zuckerberg would prefer the company to be valued closer to sub-1T, ideally a share price of $300ish and a P/E closer to 10. The FTC is going to continue its appeals to declare the company a monopoly and split it up, keeping the values low may allow him to win the appeal.
Those are different issues, you said ROI is the issue, but I showed that it’s not. I agree sentiment is poor but that’s cause people don’t view them as having the leading model. Your assertion that the stock will go down 20 is speculation. Similarly that Zuck wants market cap to be under a trillion is also conjecture. ROI isn’t the problem market sentiment towards it is and those are two separate questions.
It confuses me why MSFT is ignored this much. They are deeply embedded in businesses and governments throughout the world and even is there is a slightly better platform, switching costs are insanely high. They are the gatekeepers of all that data and the platform where all these other AI players will need to plug in.
I guess Google might become competitive but their sales tentacles just don't spread as far yet.
For Meta I'm just not seeing a vision that justifies all that spending but they will use AI to target ads better and create better marketing profiles. There will be money in that.
This is just short sighted, there is nothing wrong with skepticism or even contrarian views but to make such a proclamation seems silly. The entire world is betting on this revolution. Not everyone is gonna win, not everyone is gonna execute but everyone who has the domain expertise and qualified opinions is investing heavily into this.
Railroads faced the same level skepticism and it took a long time for it to become the biggest industry in the world. Multiple decades
Electricity, telephones, computers, even the internet. All of this takes time. Ai is already boosted productivity in some areas.
Anthropic is already claiming q2 to be profitable, we haven’t seen the filings yet but since they plan to go public this year it’s hard to imagine them just out right lying.
Skepticism is good but when the world is pushing this and you so confidently feel like you are right and they are all wrong; it makes you sound like someone who wants to do “their own research “on COVID vaccines and drink bleach instead
Adjusted EBITDA profitable. Adjusted for all their capex probably lol.
I’d like to agree, but “everyone is doing it” is an argument but not a great one, especially if you’re trying to find good deals. Anthropic’s ARR was based on a period when Elon discounted their compute, and if you take another look at the post, you’ll see that they said $5B in official documents but have been promoting $19B in the media.
I think your best argument would be to simply point to examples of actual increases in revenue, not vague references to older tech. Things take time, but I’m not debating whether the tech will improve in a decade. I want to know when the lack of ROI becomes a problem
My response was directly to the guy who “highly doubts” ai becomes profitable.
The argument isn’t everybody is doing it. The argument is why is he so sure everyone is wrong.
AI is definitely the future, but if that future is still 10-20 years to be commercially viable then lmao
I think will help the whole economy in general. It allows people to be much more productive. I feel less developed countries like Brazil will really benefit
Whenever this argument comes up I always look to Google. It’s the company I know best.
Googles ROIC has stayed steady throughout the build out so far. For that to be happening—it means they are getting good ROI on their capex spend. Even adjusting the depreciation schedule to 3 years keeps the ROIC above 20%. Obviously, they are able to use AI for ads so that’s helped them a lot. I think as long as we see the mag7 distribute AI through their pipelines correctly it won’t be a problem.
I’m mostly worried about the independent LLMs. I don’t know enough about their financial modeling, but i wonder if the subscription revenue will outpace the cash burn at some point? If tokenization is the route we are sticking to then it’s going to be commoditized (Race to the cheapest token). I don’t think that bodes well for them. Anyone got opinions or facts regarding the modeling?
I don't think they will have a big return on that Capex spending, it's a bit like the 1920s with car companies.
Massives invests, almost 2000 car Companies, everybody got excited because of that new technology and what happened? Only a few survived and they aren't doing so well.
I don't see a future where that money is returned and everybody wins, a company can cut cost with AI but it needs to be in relation to the price.
I don't think the big Companies will vanish as they have different branches like google but i don't think AI will ever return that spending.
The next liquidity issue.
Stopped reading when I see Ed Zitrons name
Those studies are bullshit, mostly.
Even being able to measure productivity is very hard in those industries where LLMs are employable in the first place.
Exceptions exist (call centers etc).
But in general, both businesses AND a lot of private people meanwhile find it normal to pay for AI tokens.
Hence I don't think at all that ROI is impossible, especially considering that compute gets cheaper quadratically or exponentially over time, depending on measure.
Yes most studies are bullshit, but still interesting given that some of them are from companies selling this stuff. I don’t think people find it normal to pay for tokens; actually most people are on subscription plans and have no idea how much they are actually spending in tokens. Same for many businesses, but the switch to usage pricing is making it more visible. People might be happy with a $200/month sub, but not spending $3k per month on tokens
Whether they pay by token or "flat rate" subscription is not relevant in the end for ROI, though. That's rather a pricing model question, but not decisive for ROI.
It's comparably to Mobil phone rate plans, where the provider decides based on customer preferences as d usage patterns what to offer.
People in all kind of corporates and privately pay for it, that's the essence.
For hackathons, the participating teams get AI credits for Claude etc.
In the area of law, a big bunch of research work will be cheaper than a human / return a significant better result when combined with a in human.
Also, it's easy to overthink/ over study it: the advantage is so obvious and their use so established, that there is no way this market isn't continue to grow and I paying for Digital services nowadays is normal and accepted.
Whether the valuations are correct is a different topic, but I see no fundamental issues.